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Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition

Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition. William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University. Chapter 14 – Auditing the Revenue Cycle. Chapter Overview.

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Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition

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  1. Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8th Edition William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Chapter 14 – Auditing the Revenue Cycle

  2. Chapter Overview

  3. The Revenue Cycle

  4. Develop Audit Objectives

  5. Inherent Risk, Including the Risk of Fraud • Management Misstatement of Revenue • Overstate revenues • Overstate cash and gross receivables • Understate allowance for doubtful accounts • Other Misstatement Factors • Opportunities for error • Timing • Misclassification • Adjustment transactions

  6. Analytical Procedures

  7. Consideration of Internal Control Components • Control Environment • Risk Assessment • Information and Communication • Monitoring • Initial Assessments of Control Risk

  8. Study Break • The revenue cycle includes all of the following transactions, except: • Credit Sales • Cash Receipt • Inventory Purchase • Sales Returns and Allowances C. Inventory Purchase

  9. Study Break • This internal control component should provide management with feedback as to whether internal controls pertaining to revenue cycle transactions and balances are operating as intended. • Monitoring • Initial Assessments of Control Risk • Information and Communication • Control Environment A. Monitoring

  10. Control Activities for Credit Sales Transactions • Credit Sales Orders • Over-the-Counter • Mail Order • Internet • Computerized Accounting System • General Controls • Application Controls

  11. Common Documents and Records • Customer Order • Sales Order • Shipping Document • Bill of Lading • Packing Slip • Sales Invoice • Authorized Price List

  12. Common Documents and Records • Sales Transactions File • Sales Journal • Customer Master File • Accounts Receivable Master File • Accounts receivable subsidiary ledger • Customer Monthly Statement

  13. Function and Control Activities • Authorizing Sales • Accepting Customer Orders • Approving Credit • Delivery of Goods and Services • Filling Sales Orders • Shipping Sales Orders • Recording Sales

  14. System Flowchart – Credit Sales

  15. System Flowchart – Credit Sales

  16. System Flowchart – Credit Sales

  17. Study Break • This document is a journal listing of the completed sales transactions. • Sales invoice • Sales transactions files • Authorized price list • Sales journal D. Sales journal

  18. Study Break • This document shows the description, quantity, and other data pertaining to a customer order. • Customer order • Sales order • Shipping document • Sales invoice B. Sales order

  19. Cash Receipts Transactions – Common Documents and Records • Remittance Advice • Prelist • Cash Count Sheets • Daily Cash Summary • Validated Deposit Slip • Cash Receipts Transactions File • Cash Receipts Journal

  20. Cash Receipts Transactions - Functions • Receiving Cash Receipts • Over-the-Counter Receipts • Mail Receipts • Depositing Cash in Bank • Deposited intact daily • Recording the Receipts

  21. Sales Adjustment Transactions – Common Documents and Records • Sales return authorization • Authorization for accounts receivable write-off • Receiving report • Credit memo • Journal entry • Cash Receipts journal

  22. Sales Adjustment Functions and Controls • Granting Cash Discounts • Granting Sales Returns and Allowances • Determining Uncollectible Accounts • Other Controls • Tests of Controls

  23. Study Break • This cash receipts transaction document is a listing of cash receipts received through the mail. • Remittance advice • Prelist • Daily cash summary • Validated deposit slip B. Prelist

  24. Study Break • All of the following are sales adjustment functions, except: • Granting cash discounts • Determining uncollectible accounts • Recording the cash receipts • Granting sales returns and allowances C. Recording the cash receipts

  25. Substantive Tests of Accounts Receivable • Determining Detection Risk for Tests of Details • Existence and Occurrence • Completeness • Rights and Obligations • Valuation and Allocation • Presentation and Disclosure

  26. Designing Substantive Tests • Initial Procedures • Analytical Procedures

  27. Designing Substantive Tests • Tests of Details of Transactions • Vouch Revenue Transactions • Trace Revenue Transactions • Perform Cutoff Tests • Sales Cutoff Tests • Sales Return Cutoff Tests • Perform Cash Receipts Cutoff Test

  28. Designing Substantive Tests • Tests of Details of Balances • Confirm Receivables • Forms of Confirmation • Positive Confirmation • Negative Confirmation • Timing and Extent of Requests • Controlling the Requests

  29. Designing Substantive Tests • Tests of Details of Balances • Disposition of Exceptions • Alternative Procedures for Dealing with Nonresponses • Summarizing and Evaluating Results • Applicability to Assertions

  30. Designing Substantive Tests • Tests of Details of Accounting Estimates • Allowance for Doubtful Accounts • Aged Trial Balance • Tests of Details of Disclosures

  31. Study Break • This type of confirmation requires a debtor to respond only when the amount shown is incorrect. • Positive Confirmation • Negative Confirmation • Avoidance • Existence B. Negative Confirmation

  32. Study Break • This cutoff test is designed to obtain reasonable assurance that cash receipts are recorded in the accounting period in which received. • Sales cutoff test • Sales return cutoff test • Vouching revenue transactions • Cash receipts cutoff test D. Cash receipts cutoff test

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