Kế toán, kiểm toán - Chapter ten: Auditing the revenue process

Auditing the Revenue ProcessChapter TenRevenue Recognition (IAS 18)Revenue is defined as the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.Overview of the Revenue ProcessInventoryAccountreceivablePurchasesInventoryCashsalesCash SalePurchasesCredit salesCashcollectionCredit SaleTypes of Transactions and Financial Statement Accounts AffectedThree types of transactions are typically processed by the revenue process:The sale of goods or rendering of a service for cash or credit.The receipt of cash from the customer in payment for goods or services.The return of goods by the customer for credit or cash.Types of Transactions and Financial Statement Accounts AffectedThe revenue process affects numerous accounts in the financial statements. The most significant accounts are:Flowchart of the Revenue Process: EarthWear ClothiersFlowchart of the Revenue Process: EarthWear Clothiers (continued)Flowchart of the Revenue Process: EarthWear Clothiers (continued)Types of Documents and RecordsCustomer Sales OrderContains the details of the type and quantity of products or services ordered by the customer and customer information.Credit Approval FormFor credit sales, the client must have a formal procedure for investigating the creditworthiness of the customer.Types of Documents and RecordsOpen-Order ReportA report of all customer orders for which processing has not been completed.Shipping DocumentThis document generally serves as a bill of lading and contains information on the type of product shipped, the quantity shipped and other relevant information.Types of Documents and RecordsSales InvoiceThe document is used to bill the customer. This document contains information on the type of product or service, the quantity, the price and the terms of trade.Sales JournalOnce a sales invoice has been issued, the sale needs to be recorded in the accounting records. The sales journal is used to record information about the sales transaction.Types of Documents and RecordsCustomer StatementThis document is mailed to the customer and contains details of all sales, cash receipts, and credit memorandum transactions.Accounts Receivable Subsidiary LedgerThis ledger contains an account and the details of transactions for each customer.Types of Documents and RecordsAged Trial Balance of Accounts ReceivableThis 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.Remittance AdviceThis is usually the part of the customer’s bill that should be returned with the payment.Types of Documents and RecordsCash Receipts JournalThis journal is used to record the cash receipts of the entity.Credit MemorandumThis document is used to record credits for the return of goods by a customer.Types of Documents and RecordsWrite-Off AuthorizationThis document authorizes the write-off of an uncollectible account receivable. Final authorization is generally received from the treasurer.Major FunctionsOrder EntryThe initial function in the revenue process is the entry of a new sales order into the system.Major FunctionsShippingGoods should not be shipped, nor should services be provided without proper authorization. The main control is payment or proper credit authorization.BillingThe objective of proper billing is to ensure that all goods shipped and all services rendered are billed to the customer.Credit AuthorizationThe credit authorization process must determine that the customer is able to pay for the goods or services purchased. Failure to properly authorize credit can lead to extensive bad debts for the entity.Cash ReceiptsAll cash collected must be properly identified and promptly deposited intact at the bank.Accounts ReceivableAll billings, adjustments, and cash collections must be properly recorded in the customers’ accounts receivable records.General LedgerAs related to the revenue process, the general ledger function must ensure that all revenues, collections, and receivables are properly recorded and classified.Major FunctionsThe Major FunctionsKey Segregation of DutiesInherent Risk AssessmentControl Risk AssessmentUnderstand and document the revenue process based on a reliance approach.Plan and perform tests of controls on revenue transactions.Set and document the control risk for the revenue process.Control EnvironmentUnderstanding the control environment is generally completed on an overall entity basis.Understanding and Documenting Internal ControlThe Entity’s Risk Assessment ProcessThe auditor must understand how management considers risks that are relevant to the revenue process. The auditor should estimate the significance of the risk and assess the likelihood of occurrence.Understanding and Documenting Internal ControlControl ActivitiesThe auditor identifies which controls ensure that the assertions for transactions and events are being met. Documentation of the auditor’s understanding of the revenue process can be accomplished by using:Procedures manualsNarrative descriptionsFlowchartsInternal control questionnairesInformation Systems and CommunicationAuditor’sknowledgeProcess by which sales, cash receipts and credit memoranda are initiated.Accounting records, supporting documents and accounts that are involved in sales, cash receipts and sales returns.The flow of each transaction from initiation to inclusion in the financial statements.The process used to prepare estimates for bad debts and sales returns.The auditor must understand how management assesses the design and operation of controls in the revenue process. This understanding should include how supervisory personnel review the personnel who perform the controls and evaluate the performance of the entity’s IT function.Monitoring of ControlsPlanning and Performing Tests of ControlsThe auditor systematically examines the client’s revenue process to identify relevant controls that help to prevent, or detect and correct material misstatements.Observations of the operation of the control.In order to properlyset control risk theauditor must testcontrols over therevenue process.Such tests may include . . .Inquiry of client personnel.Inspection of documents and records.Walkthroughs.Reperformance of the control activities.Setting and Documenting the Control RiskIf the results of the tests of controls support the planned level of control risk, the auditor conducts the planned level of substantive procedures for the account balances.The level of control risk for the revenue process canbe set using either quantitative amounts or qualitative terms such as ‘low,’ ‘medium,’ or ‘high.’Control Activities and Tests of Controls – Revenue TransactionsAssertions about Classes of Transactions and Events for the Period under AuditOccurrence of Revenue TransactionsThe auditor is concerned about two major types of material misstatements:Sales to fictitious customers.Recording revenue when goods have not been shipped or services have not been performed.The auditor needs assurance that all recordedrevenue transactions are valid.Completeness of Revenue TransactionsThe major misstatement that concerns both management and the auditor is that goods are shipped or services are performed and no revenue is recognized.Controls concerning completeness include: (1) accounting for numerical sequence of shipping documents and sales invoices; (2) matching shipping documents with sales invoices; (3) reconciling sales invoices to daily sales reports; and (4) maintaining and reviewing the open-order file.Authorization and Accuracy of Revenue TransactionsPossible misstatements due to improper authorization include shipping goods to, or performing services for, customers who are bad credit risks and making sales at unauthorized prices or terms.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 the customer.Cut-off and Classification of Revenue TransactionsSales may be recorded in the wrong accounting period unless proper controls are in place. All shipping documents should be forwarded to the billing department daily.The use of a chart of accounts and proper codes for recording transactions should provide adequate assurance about the proper classification of revenue transactions.Occurrence of Cash Receipts TransactionsThe possible misstatement that concerns the auditor when considering the occurrence assertion is that cash receipts are recorded but not deposited in the client’s bank account.Completeness of Cash Receipts and Authorization of DiscountsA major misstatement is that cash or cheques are stolen or lost before being recorded in the cash receipts records. Proper segregation of duties and a lockbox system are strong controls relating to completeness.2/10, n/30Terms of trade generally include discounts for payment within a specified period as a way of encouraging customers to pay on time.Accuracy of Cash TransactionsThe wrong amount of cash could be recorded from the remittance advice, or the receipt could be incorrectly processed during data entry. To minimize these types of errors, daily remittance reports should be reconciled to a control listing of remittance advices. All bank statements should be reconciled monthly.Cut-off and Classification of Cash Receipts TransactionsIf the client uses electronic fund transfer, a lockbox system or if cash is deposited daily in the bank, there is a small possibility of cash being recorded in the wrong accounting period.The auditor seldom has major concerns about cash receipts being recorded in the wrong financial statement account.Control Activities and Tests of Controls – Sales Returns and AllowancesSales returns and allowances is usually not a material amount in the financial statements. However, credit memoranda that are used to process sales returns can also be used to cover an unauthorized shipment of goods or conceal a misappropriation of cash. As a result, all credit memoranda should be properly authorized.Relating the Assessed Level of Control Risk to Substantive ProceduresThe auditor’s testing of control for revenue processing impacts the detection risk and therefore the level of substantive procedures impacted by the controls.CashAccountsreceivableAllowancefor baddebtsBad debtsexpenseSales returnsandallowancesAuditing Accounts Receivable and Related AccountsSubstantive analytical procedures are used to examine plausible relationships among accounts receivable and related accounts.Tests of details focus on transactions, account balances or disclosures. Tests of details concentrate on the ending balance for accounts receivable and related accounts as well as related disclosures.Substantive Analytical ProceduresRatios used for comparative purposes include:Receivables turnover and days outstanding in accounts receivable.Aging categories on aged trial balance of accounts receivable.Bad-debts expense as a per cent of revenue.Allowance for uncollectible accounts as a per cent of accounts receivable or credit sales.Large account balances compared to last period.Tests of Details of Transactions, Account Balances and DisclosureFor Accounts Receivable, Allowance for Uncollectible Accounts and Bad-Debt ExpenseCompleteness and AccuracyThe auditor’s primary concern is whether all accounts receivable have been included in the accounts receivable subsidiary ledger and the general ledger accounts receivable account.Reconciliation of the aged trial balance to the general ledger account should detect an omission of a receivable from either the subsidiary or general ledger.Cut-offThe cut-off test attempts to determine whether all revenue transactions and related accounts receivable are recorded in the proper period.31/12/10Test a few shipping documents just prior to year end.Test a few shipping documents just after year end.Are all transactions tested recorded in the proper period?Existence and Rights and ObligationsExistence is one of the more important assertions for accounts receivable because the auditor wants assurance that this account balance is not overstated through the inclusion of fictitious customer accounts or amounts. Confirmation is the major audit procedure used for testing this assertion.The auditor must determine that all accounts receivables are owned by the entity. This is usually not a problem, however, in some cases, accounts receivable may be sold or factored with or without recourse.Valuation and AllocationAccounts receivable should be shown on the balance sheet at net realizable value (gross amount less allowance for uncollectible accounts).The auditor must verify the adequacyof the allowance for uncollectibleaccounts. The first step is to prepare anaged trial balance and discuss resultswith the credit manager. Next, a comparison with last year’s results should be examined.Classification and UnderstandabilityThe Confirmation Process – Accounts ReceivablesConfirmation is the process of obtaining information from third parties about the account receivable balance. Confirmation is a good source of evidence about the existence of the account receivable. The confirmation process should be controlled by the auditor.Types of Confirmations Positive ConfirmationRequests that customers indicate whether they agree with 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 the client. Negative confirmations are used when the client has many small account balances and control risk is assessed as low.TimingAccounts receivable may be confirmed at an interim date or at year end. The confirmation request should be sent soon after the end of the accounting period in order to maximize the response rate.Confirmation ProceduresThe auditor should mail the confirmation requests outside the client’s facilities. A record should be maintained of the confirmations mailed and those returned. A second request may be necessary in some cases.For each exception received, the auditor should examine the reasons for the difference between the balance on the client’s books and the balance indicated by the customer.Alternative ProceduresWhen the auditor does not receive responses to positive confirmations, alternative audit procedures are used. These alternative procedures include:Examination of subsequent cash receipts.Examination of customer orders, shipping documents and duplicate sales invoices.Examination of other client documentation.Auditing Other ReceivablesOther types of receivables that are reported on the balance sheet may include: (1) receivables from officers and employees; (2) receivables from related parties; and (3) notes receivable. The auditor’s concern with satisfying the assertions for these receivables is similar to that for trade accounts receivable. Each of these types of receivables is confirmed and evaluated for collectibility. The transactions that result in receivables from related parties are examined to determine if they were at ‘arm’s length.’ Notes receivable would also be confirmed and examined for repayment terms and whether interest income has been properly recognized. Evaluating the Audit FindingsThe auditor compares the aggregated identified misstatement to materiality to determine if the identified misstatement would affect the audit. The auditor requests the client to correct the identified misstatements and then compares the uncorrected misstatements with materiality to conclude whether the financial statements are fairly stated.If uncorrected misstatements in accounts receivable and, when considered together with other uncorrected misstatements, are less than materiality, the auditor may accept that the financial statements are fairly presented. Conversely, if the uncorrected misstatement exceeds the materiality, the auditor should conclude that the financial statements are not fairly presented.End of Chapter 10