ch10 - Chapter 10 Auditing Revenue and Related Accounts Why...

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Chapter 10 Auditing Revenue and Related Accounts
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Why are revenue cycle accounts important? Sales transactions are always material to a company's financial statements According to the SEC, a majority of financial statement manipulations and audit failures involve overstated revenues Therefore, revenue cycle accounts must be examined with great care
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What is the cycle approach? Revenue cycle transactions include all the processes ranging from the sale to shipping a product, billing the customer, and collecting cash A company's revenue cycle transactions reflects its operations A cycle approach is one way to help the auditor focus on the important account balances surrounding a transaction to ensure that sufficient audit evidence is gathered and evaluated
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List the Financial Transactions Processing Cycles Revenue Acquisition and payment of goods and services Payroll Financing: debt and equity Cash and short-term investments
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Overview of the Revenue Cycle (Sales made on Account) Receive customer purchase order Check inventory stock status Generate back order if item not in stock Obtain credit approval Prepare shipping and packing documents Ship and verify shipment of goods Prepare the invoice Send monthly statements to customers Receive payment
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Discuss Business Risk and Business Environment Revenue recognition SAS 99 - Consideration of Fraud in a Financial Statement Audit Auditor should presume risk of material misstatement due to fraud related to revenue recognition Research shows over half of frauds involve overstating revenues
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Name Some Improper Revenue Recognition Schemes Recognize revenue on fictitious shipments Hidden side letters that give customers unlimited right to return product Record consignment sales as final sales Accelerated recognition of sales occurring after year-end Ship unfinished goods Ship goods before date agreed to by customer Create fictitious invoices Ship goods never ordered Ship more goods than ordered Record shipments to company's warehouse as sales Record shipments of replacement goods as new sales
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What are some fraud risk factors for revenue recognition? There are a number of types of 'red flags' which signal the potential for fraud in the financial statements External risk indicators Internal red flags Unusual financial results Auditor deals with red flags by Examining external pressures that could lead to financial reporting fraud Examining the financial statements to determine if account balances seem out of line
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What analytical analysis can be done for possible misstatements? Compare client revenue trend with economic conditions and industry trends Compare cash flow from operations with net income Perform analytical procedures Ratio analysis Trend analysis Reasonableness tests
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Review Assessment of Environment Risk Risk assessment is ongoing process in every audit
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