Modern Auditing: - PowerPoint Presentation

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

William C. BoyntonCalifornia Polytechnic State University at San Luis ObispoRaymond N. JohnsonPortland State University

Chapter 14 – Auditing the Revenue CycleSlide2

Chapter OverviewSlide3

The Revenue CycleSlide4

Develop Audit ObjectivesSlide5

Inherent Risk, Including the Risk of FraudManagement Misstatement of RevenueOverstate revenuesOverstate cash and gross receivablesUnderstate allowance for doubtful accountsOther Misstatement FactorsOpportunities for errorTimingMisclassificationAdjustment transactionsSlide6

Analytical ProceduresSlide7

Consideration of Internal Control ComponentsControl EnvironmentRisk AssessmentInformation and CommunicationMonitoringInitial Assessments of Control RiskSlide8

Study BreakThe revenue cycle includes all of the following transactions, except:Credit SalesCash ReceiptInventory PurchaseSales Returns and AllowancesC. Inventory Purchase Slide9

Study BreakThis internal control component should provide management with feedback as to whether internal controls pertaining to revenue cycle transactions and balances are operating as intended.MonitoringInitial Assessments of Control RiskInformation and CommunicationControl EnvironmentA. Monitoring Slide10

Control Activities for Credit Sales TransactionsCredit Sales OrdersOver-the-CounterMail OrderInternetComputerized Accounting SystemGeneral ControlsApplication ControlsSlide11

Common Documents and RecordsCustomer OrderSales OrderShipping DocumentBill of LadingPacking SlipSales InvoiceAuthorized Price ListSlide12

Common Documents and RecordsSales Transactions FileSales JournalCustomer Master FileAccounts Receivable Master FileAccounts receivable subsidiary ledgerCustomer Monthly StatementSlide13

Function and Control ActivitiesAuthorizing SalesAccepting Customer OrdersApproving CreditDelivery of Goods and ServicesFilling Sales OrdersShipping Sales OrdersRecording SalesSlide14

System Flowchart – Credit SalesSlide15

System Flowchart – Credit SalesSlide16

System Flowchart – Credit SalesSlide17

Study BreakThis document is a journal listing of the completed sales transactions.Sales invoiceSales transactions filesAuthorized price listSales journalD. Sales journalSlide18

Study BreakThis document shows the description, quantity, and other data pertaining to a customer order.Customer orderSales orderShipping documentSales invoiceB. Sales orderSlide19

Cash Receipts Transactions – Common Documents and RecordsRemittance AdvicePrelistCash Count SheetsDaily Cash SummaryValidated Deposit SlipCash Receipts Transactions FileCash Receipts JournalSlide20

Cash Receipts Transactions - FunctionsReceiving Cash ReceiptsOver-the-Counter ReceiptsMail ReceiptsDepositing Cash in BankDeposited intact dailyRecording the ReceiptsSlide21

Sales Adjustment Transactions – Common Documents and RecordsSales return authorizationAuthorization for accounts receivable write-offReceiving reportCredit memoJournal entryCash Receipts journalSlide22

Sales Adjustment Functions and ControlsGranting Cash DiscountsGranting Sales Returns and AllowancesDetermining Uncollectible AccountsOther ControlsTests of ControlsSlide23

Study BreakThis cash receipts transaction document is a listing of cash receipts received through the mail.Remittance advicePrelistDaily cash summaryValidated deposit slipB. PrelistSlide24

Study BreakAll of the following are sales adjustment functions, except:Granting cash discountsDetermining uncollectible accountsRecording the cash receiptsGranting sales returns and allowancesC. Recording the cash receiptsSlide25

Substantive Tests of Accounts ReceivableDetermining Detection Risk for Tests of DetailsExistence and OccurrenceCompletenessRights and ObligationsValuation and AllocationPresentation and DisclosureSlide26

Designing Substantive TestsInitial ProceduresAnalytical ProceduresSlide27

Designing Substantive TestsTests of Details of TransactionsVouch Revenue TransactionsTrace Revenue TransactionsPerform Cutoff TestsSales Cutoff TestsSales Return Cutoff TestsPerform Cash Receipts Cutoff TestSlide28

Designing Substantive TestsTests of Details of BalancesConfirm ReceivablesForms of ConfirmationPositive ConfirmationNegative ConfirmationTiming and Extent of RequestsControlling the RequestsSlide29

Designing Substantive TestsTests of Details of BalancesDisposition of ExceptionsAlternative Procedures for Dealing with NonresponsesSummarizing and Evaluating ResultsApplicability to AssertionsSlide30

Designing Substantive TestsTests of Details of Accounting EstimatesAllowance for Doubtful AccountsAged Trial BalanceTests of Details of DisclosuresSlide31

Study BreakThis type of confirmation requires a debtor to respond only when the amount shown is incorrect.Positive ConfirmationNegative ConfirmationAvoidanceExistenceB. Negative ConfirmationSlide32

Study BreakThis cutoff test is designed to obtain reasonable assurance that cash receipts are recorded in the accounting period in which received.Sales cutoff testSales return cutoff testVouching revenue transactionsCash receipts cutoff testD. Cash receipts cutoff test