ACCT_3444_Chapters_14_and_15

ACCT_3444_Chapters_14_and_15 - Accounting 3444 Lecture 8...

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Accounting 3444 Lecture 8 Lecture 7 recap -Ch 11 and 13 Fraud Concepts Forms Conditions (the Triangle) Managements Responsibilities Auditors Responsibilities Sampling Why? Statistical vs. Non statistical Steps in the Sampling Process Chapter 11 and 13 Wrap Up In-Class Exercises Chapter 11- 11-31 Chapter 13- Problems 13-24 1
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Chapter 14 – Revenue and Collection Cycle Revenue Recognition Principle HB 3400 –see IAS 18 for IFRS principles Revenue is the inflow of cash, receivables and other consideration arising in the course of ordinary activities of the enterprise, normally from the sale of goods, the rendering of services and the use by others of enterprise resources yielding interest, royalties, and dividends. Revenue must be realized and earned (entity has substantially completed the earnings process), before it is recognized. Revenue should be recognized when ( PMC ): 1. P erformance - The seller has transferred to the buyer the significant risks and rewards of ownership . 2. M easurement - Reasonable assurance exists regarding the measurement of the consideration that will be derived from the sale (includes ability to estimate potential returns) 3. C ollection is reasonably assured. Revenues are earned when the entity has substantially completed the earnings process, which generally means the product has been delivered or the service has been provided ***From an auditing perspective, revenue recognition is to be considered a significant risk, as well as a fraud risk therefore, the revenue process is a critical, high-risk section of the audit file. 2
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Transactions processed through the revenue process : 1. Sale of goods or rendering of a service for cash/receipt 2. Receipt of cash from the customer in payment for the goods or services 3. The return of goods by the customer for credit or cash 4. Bad Debt Expense 5. Charge off Uncollectable accounts Key Accounts Affected: Sales Trade Accounts Receivable Allowance for uncollectible accounts Bad-debt expense Cash Cash Discounts Sales returns and allowances The 9 Key Business Functions in the Revenue Process and Related Documents 1. Customer Order – request for goods is received from the customer 2. Credit Granting Process – before goods are shipped and sold on account, credit should be authorized and a maximum credit maximum limit determined. To minimize bad debt expense/ uncollectable accounts receivable o Should be done before any sales are made- usually when the master file is created. Document: Master File - Established when customer is first set up in the accounting function. Includes Customer name/ code (number), billing address, 3
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shipping address, phone number, credit limit payment terms etc. A key control- limit the ability to add/ change
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ACCT_3444_Chapters_14_and_15 - Accounting 3444 Lecture 8...

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