AUDITING THE REVENUE
PROCESS
AUDIT I
Prepared by: Siti Hajar Asmah bt Ali
REVENUE RECOGNITION
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 Process
Cash Sale Credit Sale
Cash
Purchases collection Purchases
Inventory
Cash Account
sales receivable
Inventory
Credit sales
Types of documents and records
Customer
Customer Sales
Sales Order
Order
Contains
Contains the
the details
details of
of the
the type
type and
and quantity
quantity of
of products
products or
or services
services
ordered
ordered by
by the
the customer.
customer.
Credit
Credit Approval
Approval Form
Form
For
For credit
credit sales,
sales, the
the client
client must
must have
have aa formal
formal activity
activity (procedure)
(procedure) for
for
investigating
investigating the
the creditworthiness
creditworthiness ofof the
the customer.
customer.
Open-Order
Open-Order Report
Report
AA report
report of
of all
all customer
customer orders
orders for
for which
which processing
processing has
has not
not been
been
completed.
completed.
Shipping
Shipping Document
Document
This
This document
document generally
generally serves
serves as
as aa bill
bill of
of lading
lading and
and contains
contains
information
information onon the
the type
type of
of product
product shipped,
shipped, thethe quantity
quantity shipped
shipped and
and other
other
relevant
relevant information.
information.
Sales
Sales Invoice
Invoice
The
The document
document is is used
used to
to bill
bill the
the customer.
customer. This
This document
document contains
contains
information
information on
on the
the type
type of
of product
product or or service,
service, the
the quantity,
quantity, the
the price
price and
and the
the
terms
terms of
of trade.
trade.
Sales
Sales Journal
Journal
Once
Once aa sales
sales invoice
invoice has
has been
been issued,
issued, the
the sale
sale needs
needs to
to be
be recorded
recorded in
in the
the
accounting
accounting records.
records. The
The sales
sales journal
journal is
is used
used to
to record
record information
information about
about
the
the sales
sales transaction.
transaction.
Customer
Customer Statement
Statement
This
This document
document is is mailed
mailed to
to the
the customer
customer and
and contains
contains details
details of
of all
all sales,
sales,
cash
cash receipts,
receipts, and
and credit
credit memorandum
memorandum transactions.
transactions.
Accounts
Accounts Receivable
Receivable Subsidiary
Subsidiary Ledger
Ledger
This
This ledger
ledger contains
contains an
an account
account and
and the
the details
details of
of transactions
transactions for
for each
each
customer.
customer.
Aged
Aged Trial
Trial Balance
Balance of
of Accounts
Accounts Receivable
Receivable
This
This report
report summarizes
summarizes allall the
the customer
customer balances
balances in in the
the accounts
accounts
receivable
receivable subsidiary
subsidiary ledger.
ledger. Each
Each account
account is
is classified
classified asas current
current or
or
placed
placed into
into one
one of
of several
several past
past due
due categories.
categories.
Types of Documents and Records
Shipping
Shipping
Goods
Goods should
should not
not be
be shipped,
shipped, nor
nor should
should
services
services be
be provided
provided without
without proper
proper
authorization.
authorization. The
The main
main control
control is
is
Credit
Credit Authorization
Authorization payment
payment oror proper
proper credit
credit authorization.
authorization.
The
The credit
credit authorization
authorization process
process must
must
determine
determine thatthat the
the customer
customer is is able
able to
to
pay
pay for
for the
the goods
goods or
or services
services purchased.
purchased.
Failure
Failure toto properly
properly authorize
authorize credit
credit can
can
lead
lead to
to extensive
extensive bad
bad debts
debts for
for the
the entity.
entity.
Billing
Billing
The
The objective
objective of
of proper
proper billing
billing is
is to
to ensure
ensure that
that all
all goods
goods
shipped
shipped and
and all
all services
services rendered
rendered are are billed
billed to
to the
the
customer.
customer.
Assertions about Classes of Transactions
(Revenue cycle)
All revenue and cash receipt transactions and events
Occurrence that have been recorded have occurred and pertain to
the entity.
All revenue and cash receipt transactions and events
Completeness
that should have been recorded have been recorded.
Amounts and other data relating to recorded revenue
Accuracy 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.
All revenue and cash receipt transactions and events
Classification
have been recorded in the proper accounts.
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.
• In order to prevent fictitious sale, below
control 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 statements handled
independently
Completeness
The major misstatement that concerns both
management and the auditor is that goods are
shipped or services are performed and no
revenue is recognized.
Control
Control procedure
procedure to
to prevent
prevent violation
violation of
of
completeness:
completeness:
Maintain
Maintain numerical
numerical sequence
sequence ofof
document
document (( shipping
shipping document
document & & sales
sales
invoice)
invoice)
Shipping
Shipping documents
documents matched
matched toto sales
sales
invoices
invoices
Sales
Sales invoices
invoices reconciled
reconciled to
to daily
daily sales
sales
report
report
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 the
customer.
Control
Control procedure
procedure to to prevent
prevent violation
violation of
of
valuation
valuation && allocation:
allocation:
Sales
Sales invoice
invoice must
must always
always agreed
agreed to
to
shipping
shipping document
document and and customer
customer order
order for
for
product
product type
type and
and quantity,
quantity, mathematical
mathematical
accuracy
accuracy ofof sales
sales invoice
invoice verified
verified
Reconcile
Reconcile sales
sales invoice
invoice to
to daily
daily sales
sales report
report
Cutoff
Sales may be recorded in the wrong accounting
period.
Possible misstatements Control procedure
• Revenue transactions recorded in • All shipping documents forwarded
the wrong period to the billing function daily
• Daily billing of goods shipped
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.
Understanding and Documenting Internal
Control
The auditor identifies what 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 Narrative Internal control
Flowcharts
manuals descriptions questionnaires
Substantive Procedures
Assertions about classes of transactions
Management assertions about account
balances
(Account Receivable)
Substantive Procedures
Assertions about account balances
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.
Type of confirmation
•• Positive
Positive Confirmation
Confirmation •• Negative
Negative Confirmation
Confirmation
Requests
Requests that
that customers
customers Requests
Requests that
that the
the
indicate
indicate whether
whether theythey customer
customer respond
respond onlyonly
agree
agree with
with the
the amount
amount when
when theythey disagree
disagree withwith
due
due to
to the
the client.
client. the
the amount
amount duedue toto the
the
A client.
client.
A response
response isis expected
expected
whether Negative
Negative confirmations
confirmations are are
whether the
the customer
customer
agrees used
used when
when the
the client
client has
has
agrees oror disagrees
disagrees withwith
the many
many small
small account
account
the balance
balance indicated.
indicated.
balances
balances andand control
control risk
risk
is
is assessed
assessed as as low.
low.
Confirmation Procedures
The 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
For each
each exception
exception received,
received, the
the
auditor
auditor should
should examine
examine thethe reasons
reasons for
for
the
the difference
difference between
between the
the balance
balance on
on
the
the client’s
client’s books
books and
and the
the balance
balance
indicated
indicated by
by the
the customer.
customer.
Examples of exceptions to confirmation
requests
• In some circumstances, sending
confirmation is not reliable:
– The response rates would be
inadequate.
– The responses are expected
unreliable.
– Inadequacy of information.
Alternative Procedures
When the auditor does not
not receive responses
to
to positive
positive confirmations,
confirmations, alternative
alternative audit
audit
procedures
procedures are
are used. These alternative
procedures include:
1.
1. Examination
Examination of
of subsequent
subsequent cash
cash receipts.
receipts.
2.
2. Examination
Examination ofof customer
customer orders,
orders, shipping
shipping documents
documents and
and duplicate
duplicate
sales
sales invoices.
invoices.
3.
3. Examination
Examination of
of other
other client
client documentation.
documentation.
Evaluating the Audit Findings
When the auditor has completed the planned
substantive procedures, the likely misstatement for
accounts receivable is determined.
Likely misstatement* Likely misstatement*
less than tolerable greater than tolerable
misstatement misstatement
Accept the account Account is not fairly
as fairly presented presented.
The end
