Auditing-Ch10 - Chapter 10 Auditing The Revenue Process 1 Chapter 10 Contents I II III IV V VI VII Revenue Recognition Overview of the revenue process

Auditing-Ch10 - Chapter 10 Auditing The Revenue Process 1...

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Chapter 10 Auditing The Revenue Process 1
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I. Revenue Recognition. II. Overview of the revenue process III. Inherent Risk Assessment IV. Control Risk Assessment V. Control Activities & Test of Controls – Revenue Transactions VI. Control Activities & Test of Controls – Cash Receipts VII. Control Activities & Test of Controls Sales Returns & Allowances Transactions VIII. Relating the assessed level of Control Risk to Substantive procedures IX. Auditing Accounts Receivable & Related Accounts X. Substitutive analytical Procedures XI. Test of Details of Classes of Transactions, Account Balances, and Disclosures XII. The Confirmation Process – Account Receivables XIII. Auditing Other Receivables XIV. Evaluating the Audit Findings – Accounts Receivable & Related Accounts Contents Chapter 10
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I. Revenue Recognition: Chapter 10 3 Revenue is defined as: “Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivery or producing goods, rendering services, or other activities that constitute the entity’s major or central operations.” Revenues are measured by the exchange value of goods and services provided. Criteria for revenue recognition: Persuasive evidence of an arrangement exists Delivery has occurred or services have been rendered The seller’s price to the buyer is fixed or determinable Collectability is reasonably assured
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I. Revenue Recognition: Chapter 10 4 There are 8 methods for committing financial statement fraud: 1. Early revenue recognition 2. Holding the books open past the accounting period 3. Fictitious sales 4. Failure to record returns 5. Fraud in the percentage of completion method 6. Related-party transactions 7. Overstating receivables and inventory 8. Liability and expense omissions The auditor should be alert for the following fraud risks related to revenue recognition: Side agreements – used to alter the terms and conditions of recorded sales Channel stuffing boost sales by inducing distributors to buy substantially more inventory than they can promptly resell
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II. Overview of the revenue process: Chapter 10 5 Types of transactions and financial statement accounts affected Types of documents and records The major functions The key segregation of duties
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II. Overview of the revenue process: Chapter 10 6 Types of Transactions and Financial Statement Accounts Affected:
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II. Overview of the revenue process: Chapter 10 7 Types of Documents and Records:
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II. Overview of the revenue process: Chapter 10 8 The Major Functions Order Entry Acceptance of customer orders for goods and services into the system in accordance with management criteria Credit Authorization Appropriate approval of customer orders for creditworthiness Shipping Shipping of goods that has been authorized Billing Issuance of sales invoices to customers for goods shipped or services provided; also, processing of billing adjustments for allowances, discounts, and returns Cash Receipts Processing of the receipt of cash from customers
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