Chapter 09 Auditing The Revenue Cycle.pptx - CHAPTER 9...

CHAPTER
9
Auditing the Revenue Cycle
Adapted from publisher's slides 1

Learning Objectives
LO 1 Identify the significant accounts, disclosures, and relevant assertions in the
revenue cycle.
LO 2 Identify and assess inherent risks in the revenue cycle and responses to
risk.
LO 3 Identify and assess fraud risks in the revenue cycle and responses to risk.
LO 4 Identify and assess control risks in the revenue cycle and responses to risk.
LO 5 Describe how to use planning analytical procedures to identify possible
material misstatements for revenue cycle accounts, disclosures, and
assertions.
LO 6 Determine and apply sufficient appropriate substantive audit procedures
for testing revenue cycle accounts, disclosures, and assertions.
LO 7 Apply the frameworks for professional decision making and ethical decision
making to issues involving the audit of revenue cycle accounts, disclosures,
and assertions.
Adapted from publisher's slides 2

Significant Accounts, Disclosures, and
Relevant Assertions in the Revenue Cycle
•
The revenue cycle involves:
•
Receiving a customer’s order
• Approving credit for a sale
•
Determining whether the goods are available for shipment
•
Shipping the goods
•
Billing the customer
•
Collecting cash
•
Recognizing the effect of this process on revenue and other related accounts
•
Significant accounts
•
Revenue
•
accounts receivable and allowance for bad debt
•
For specific accounts and specific clients, some assertions are more relevant
than other
Adapted from publisher's slides 3

The Revenue Cycle
Adapted from publisher's slides 4

Major Processes in the Revenue Cycle
Adapted from publisher's slides 5
1. Receive a customer
Purchase order
2. Check inventory stock
status
3. Generate back
4. Obtain credit approval
5. Prepare shipping and
packing documents
6. Ship and verify s
shipment of goods
7. Prepare and send the
invoice
8. Send monthly
statements to customers
9. Receive payments

An Overview of the Audit Opinion
Formulation- Process in the Revenue
Cycle
•
Auditing the revenue cycle
•
Risk assessment procedures
• Tests of controls
•
Substantive procedures
Adapted from publisher's slides 6

Identifying Inherent Risks
•
Inherent Risks: Revenue
• Timing of revenue recognition
• Criteria for Revenue Recognition
1. Identify the contract with the customer
2. Identify the performance obligations
3. Determine the transaction price
4. Allocate the transaction price to the deliverables
5. Recognize revenue when (or as) you satisfy performance obligations
•
Inherent Risks: Accounts Receivable –some examples of risks
•
Receivables are pledged as collateral against specific loans with restricted use (disclosures of such
restrictions are required).
•
Receivables are incorrectly classified as current when the likelihood of collection during the next
year is low.