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.
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- Fall '18
- Financial audit