Topic 8 audit of revenue & receipts cycle + acc receivable

1. TOPIC 8: AUDIT OF REVENUE AND RECEIPTS
CYCLE
+ ACCOUNT RECEIVABLES
References: Chapter 14 & 16
AUD390 2014
AUDITING AND ASSURANCE
SERVICES
IN MALAYSIA

2. LEARNING OUTCOMES
AUD390 2014
 OVERVIEW OF THE ACCOUNTS & CLASSES OF
TRANSACTIONS
 BUSINESS FUNCTIONS & DOCUMENTS
 FINANCIAL REPORT ASSERTIONS
 MAJOR INTERNAL CONTROL AND RELATED AUDIT
PROCEDURES
 SUBSTANTIVE TESTS FOR ACCOUNTS RECEIVABLE

3. OVERVIEW OF
REVENUE & RECEIPTS CYCLE
AUD390 2014
 Accounts in the Cycle
 Classes of Transactions
 Business functions
 Documents & records

4. Accounts In The Cycle
AUD390 2014
 Cash Sales: Cash/Bank Acc vs. Sales Acc
 Credit Sales: Acc Receivable vs. Sales Acc
 Sales Return & Allowance: Sales Return Acc vs. Acc
receivable vs. Cash/Bank Acc
 Charge of for bad debts: Bad Debt Expense Acc vs. Acc
Receivable

5. Classes of Transactions
AUD390 2014
1. Sales (cash and sales on account)
2. Cash receipts
3. Sales returns & allowances
4. Charge-off of uncollectible accounts
5. Estimate of bad debt expense

6. AUD390 2014
CLASSES OF
TRANSACTION
S
ACCOUNTS BUSINESS
FUNCTIONS
DOCUMENTS &
RECORDS
1.Sales Sales
Acc Receivable
i. Processing
customer order
ii. Granting
credit
iii. Shipping
goods
iv. Billing
customers &
recording sales
Customer order
Sales order
Customer order
or sales order
Shipping
document
Sales invoice
Sales
transaction file
Sales journal or
listing
Account
receivable
master file
Accounts
receivable trial
balance

7. AUD390 2014
CLASSES OF
TRANSACTIONS
ACCOUNTS BUSINESS
FUNCTIONS
DOCUMENTS &
RECORDS
2. Cash Receipts Bank
Account
Receivable
v. Processing &
recording cash
receipts
Remittance advice
Prelisting of cash
receipts
Cash receipts
transaction file
Cash receipts
journal or listing
3. Sales returns &
Allowances
Sales Returns &
Allowances
Account
Receivable
vi. Processing &
recording sales
returns &
allowances
Credit memo
Sales returns &
allowances journal
4. Charge-off of
uncollectible
accounts
Account
Receivable
Allowance for
uncollectible
accounts
vii. Charging off
uncollectible
accounts
receivable
Uncollectible
account
authorization form
General journal
5. Bad Debt
Expense
Bad debt expense
Allowance for
viii. Providing for
bad debts
General journal

8. KEY CONTROL ACTIVITIES
AUD390 2014
1. Adequate separation of duties
2. Proper authorization
3. Adequate documents & records
4. Prenumbered documents
5. Monthly statements
6. Internal verification procedures

9. Adequate Separation Of Duties
AUD390 2014
 Important to prevent various types of intentional &
unintentional type of misstatements
 General example guidelines:
 Anyone responsible for inputting sales and cash
receipts transaction information into the computer
being denied to access to cash
 To separate credit-granting function from the sales
function because credit checks are intended to
influence sales personnel to optimize volume of sales
even at the expense of high bad debt written off

10. Proper Authorization
AUD390 2014
 Authorization at three key
points
1. Credit must be properly
authorized before a sale
take places
2. Goods should be shipped
only after proper
authorization
3. Price, including basic
terms, freight, & discount
must be authorized
To prevent the loss of
company assets by
shipping to fictitious
customers or those
who fail to pay for the
goods
To ensure that the sale
is billed at the price
set by company policy

11. Adequate Documents & Records
AUD390 2014
 General example guidelines:
 Prepare a multicopy prenumbered sales invoice
at the time a customer order is received. Copies
are used for different purpose:
 Approve credit
 Authorize shipment
 Record the number of unit shipped
 Billed customers

12. Pre-numbered Documents
AUD390 2014
 Use of prenumbering, to prevent:
 the failure to bill or record sales
 The occurrence of duplicate billings and recordings
 E.g.
 A billing clerk filed a copy of all shipping documents in
sequential order after each shipment is billed
 To program the computer to prepare a listing of unused
numbers at month’s end with follow-up by appropriate
personnel

13. Monthly Statements
AUD390 2014
 It is sending monthly to customer either generated by
computer or by someone who has no direct
relationship in handling cash or preparing sales &
account receivables
 It encourage a response from customers if the
balance is improperly stated

14. Internal Verification Procedures
AUD390 2014
 Use of computer programs or independent persons for
checking the processing and recording of sales
transactions
 E.g.
 Accounting for the numerical sequence of
prenumbered documents
 Checking the accuracy of document preparation
 Receiving reports for unusual or incorrect items

15. AUDIT OF
ACCOUNT RECEIVABLES
AUD390 2014
 Using Tests of Details of Balance
1. Recorded Acc Receivables exist
2. Existing Acc Receivables are included
3. Acc Receivables are accurate
4. Acc Receivables are properly classified
5. Cutoff for Acc Receivables is correct
6. Acc Receivables is stated at realizable value
7. The client has rights to Acc Receivable
8. Acc Receivable presentation & disclosure are
proper

16. Recorded Account Receivables Exist
AUD390 2014
 Determine the existence of A.R. amount through
confirmation with customers
 ISA505 External Confirmation provides guideline to
auditors in using confirmation letter as a method to
obtain audit evidence
 In using confirmation, auditor must decide
Type of confirmation (positive, negative or blank
confirmation)
Timing of the procedures (when to request the
information)
Sample size
Individual items to select

17. Existing Account
Receivables Are Included
AUD390 2014
 By footing the A.R. trial balance & reconciling the
balance with the control account in the general
ledger

18. Account Receivables Are Accurate
AUD390 2014
 Tests of the debit & credit to individual customers’
balances are done by examining supporting
documentation for shipments & cash receipts

19. Account Receivables
Are Properly Classified
AUD390 2014
 Review aged trial balance to ensure A.R. is properly
classifies under current assets

20. Cutoff For
Account Receivables Is Correct
AUD390 2014
 To verify whether transactions near the end of accounting
period are recorded in the proper period
 Example: checking the intentional or unintentional
inclusion of several large and subsequent period sales in
the current period

21. Account Receivables
Is Stated At Realizable Value
AUD390 2014
 To evaluate the account allowance for uncollectible
accounts

22. The Client Has Rights To
Account Receivable
AUD390 2014
 Not the issue since A.R. usually belong to the customer
 Audit procedures involved:
 Review of minutes
 Discussion with the client
 Confirmation with bank
 Examination of debts contract for evidence of AR pledged
as collateral

23. Account Receivable
Presentation & Disclosure Are Proper
AUD390 2014
 According to generally accepted accounting principles &
presentation and disclosure requirements