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8/12/2019 Audit of Sales and Account Receivables
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AUDITING THE REVENUEPROCESS
AUDIT IPrepared by: Siti Hajar Asmah bt Ali
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REVENUE RECOGNITIONRevenue is defined as the gross inflowof
economic benefits during the period arising in
the course of the ordinary activities of anentity when those inflows result in increases in
equity, other than increases relating to
contributions from equity participants.
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Overview of the Revenue Process
Purchases
Inventory
Credit sales
Account
receivable
Cash
collectionPurchases
Inventory
Cash
sales
Cash Sale Credit Sale
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Types of documents and recordsCustomer Sales Order
Contains the details of the type and quantity of products or services
ordered by the customer.
Credit Approval Form
For credit sales, the client must have a formal activity (procedure) for
investigating the creditworthinessof the customer.
Open-Order Report
A report of all customer ordersfor which processing has no tbeen
completed.
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Shipping Document
This document generally serves as a bill of lading and contains
information on the type of product shipped, the quantity shipped and otherrelevant information.
Sales Invoice
The document is used to bill the customer. This document containsinformation on the type of product or service, the quantity, the price and the
terms of trade.
Sales Journal
Once a sales invoice has been issued, the sale needs to be recorded in theaccounting records. The sales journal is used to record information about
the sales transaction.
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Customer Statement
This document is mailed to the customer and contains details of all sales,
cash receipts, and credit memorandum transactions.
Accounts Receivable Subsidiary Ledger
This ledger contains an account and the details of transactionsfor eachcustomer.
Aged Trial Balance of Accounts Receivable
This report summarizes all the customer balances in the accounts
receivable subsidiary ledger. Each account is classified as current or
placed into one of several past due categories.
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Types of Documents and Records
Shipping
Goods should not be shipped, nor should
services be provided without properauthorization. The main control is
payment or proper credit authorization.
Billing
The objective of proper billing is to ensure that all goodsshipped and all services rendered are billed to thecustomer.
Credit Authorization
The credit authorization process must
determine that the customer is able to payfor the goods or services purchased.
Failure to properly authorize credit canlead to extensive bad debtsfor the entity.
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Assertions about Classes of Transactions(Revenue cycle)
Occurrence
All revenue and cash receipt transactions and events
that have been recorded have occurred and pertain to
the entity.
CompletenessAll revenue and cash receipt transactions and events
that should have been recorded have been recorded.
Accuracy
Amounts and other data relating to recorded revenue
and cash receipt transactions and events have been
recorded appropriately.
Cutoff All revenue and cash receipt transactions and events
have been recorded in the correct accounting period.
ClassificationAll revenue and cash receipt transactions and events
have been recorded in the proper accounts.
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Occurrence
The auditor is concerned about two major types of
material misstatements:
1. Sales to fictitious customers.2. Recording revenue when goods have not been shipped or services
have not been performed.
The auditor needs assurance that all recorded
revenue transactions are valid.
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In order to prevent fictitious sale, belowcontrol procedures should be practiced by
management:
Segregation of duties ( shipping function &order entry & billing function)
Sales recorded only with approved customer
order and shipping document Customer monthly statementshandled
independently
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Completeness
The major misstatement that concerns both
management and the auditor is that goods are
shippedor services are performed and no
revenue is recognized.Control procedure to prevent violation of
completeness:
Maintain numerical sequence of
document ( shipping document & sales
invoice) Shipping documents matched to sales
invoices
Sales invoices reconciled to daily sales
report
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Accuracy
The presence of an authorized price list and
terms of trade reduces the risk of inaccuracies.
The sales invoice should also be verified for
mathematical accuracy before being sent to thecustomer.
Control procedure to prevent violation of
valuation & allocation:
Sales invoice must always agreed to shippingdocument and customer order for producttype and quantity, mathematical accuracy of
sales invoice verified
Reconcile sales invoice to daily sales report
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Cutoff
Sales may be recorded in the wrong accounting
period.
Possible misstatements Control procedure
Revenue transactions recorded in
the wrong period
All shipping documents forwarded
to the billing function daily
Daily billing of goods shipped
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Classification
The use of a chart of accounts and proper codes
(for a different products) for recording
transactions should provide adequate assurance
about the proper classification of revenue
transactions.
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Understanding and Documenting Internal
ControlThe auditor identifies what controls ensure that the
assertions for transactions and events are being met.
Documentation of the auditors understanding of the
revenue process can be accomplished by using:
Procedures
manuals
Narrative
descriptionsFlowcharts
Internal control
questionnaires
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Substantive Procedures
Select a sample of sales transactions from sales journaland trace sales invoices back to customer orders andshipping documentsOccurrence
Trace a sample of shipping documents to the details in theSI and to the sales journal and debtors subsidiary
Completeness
Compare prices and terms on a sample of SI with theauthorized price list and terms of tradeAccuracyCompare dates on a sample of SIwith the dates ofshipmentand with the dates they were recorded in thesales journalCutoffExamine a sample of SI for proper classification in torevenue accounts
Classification
Assertions about classes of transactions
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Management assertions about account
balances
(Account Receivable)
Recorded account receivable andrelated balances existExistence
The entity holds or controls the rightsto the ARRights &obligations
All AR that should have been recordedhave been recordedCompleteness
AR & related accounts are included inthe f/s at appropriate amounts
Valuation &allocation
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Substantive Procedures
Obtain confirmation for a selected sample of accountsreceivable
Existence
Review bank confirmations for any liens on receivablesRights and
obligations
Obtain aged trial balance of accounts receivable andagreeing of total to general ledgerCompletenessExamination of a sample of sales invoices and shipping
documents for a few days before and after year end forrecording sales in proper period.CutoffEvaluate the results of the confirmations of selectedaccount receivables
Valuation &allocation
Assertions about account balances
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The Confirmation Process
Confirmation is the process of obtaining
information from third parties about the account
receivable balance.
Confirmation is a good source of evidence about
the validity of the account receivable.
The confirmation process should be controlled by
the auditor.
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Type of confirmation
Positive Confirmation
Requests that customers
indicate whether they
agreewith the amount
due to the client.
A response is expected
whether the customer
agrees or disagrees with
the balance indicated.
Negative Confirmation
Requests that the
customer respond only
when they disagree with
the amount due to theclient.
Negative confirmations are
used when the client has
many small accountbalances and control risk
is assessed as low.
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Confirmation Procedures
The auditorshould mail the confirmation requestsoutside the clients facilities. A record should be
maintained of the confirmations mailed and those
returned. A second request may be necessary in somecases.
For each exception received, the
auditor should examine the reasons for
the difference between the balance onthe clients books and the balance
indicated by the customer.
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Timing difference
Goods delivered to wrong customer
Invoice sent to wrong customer
Fictitious sale
Goods not received bycustomer
Timing differenceCash misappropriate
Payment applied to wrong customer account
Payment not recordedin entitys sale
Incorrect quantity or price
Recording the errorProcessing error
Price of goods in dispute
Goods damage in transitAmount dispute
Examples of exceptions to confirmation
requests
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In some circumstances, sending
confirmation is notreliable:
The response rates would beinadequate.
The responses are expected
unreliable.Inadequacy of information.
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Alternative Procedures
When the auditor does not receive responses
to positive confirmations, alternative audit
procedures are used. These alternative
procedures include:1. Examination of subsequent cash receipts.
2. Examination of customer orders, shipping documents and duplicate
sales invoices.
3. Examination of other client documentation.
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Evaluating the Audit Findings
When the auditor has completed the planned
substantive procedures, the likely misstatement for
accounts receivable is determined.
Likely misstatement*
less than tolerable
misstatement
Likely misstatement*
greater than tolerable
misstatement
Accept the account
as fairly presented
Account is not fairly
presented.
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The end
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