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The accuracy assertion also includes the possibility that transactions are not posted correctly to the sales journal, customers’ accounts in accounts receivable subsidiary ledger, or the general ledger. In the revenue process, control totals should be utilized to reconcile sales invoices to the daily sales report, and the daily recordings in the sales journal should be reconciled with the posting to the accounts receivable subsidiary ledger. The accounts receivable subsidiary ledger should periodically be reconciled to the general ledger control account. In a properly designed revenue system, such controls are CHAPTER 10 Auditing the Revenue Process
programmed and reconciled by the control groups in the IT department and the user departments. The auditor can examine and test the application controls and various reconciliations. Cutoff of Revenue TransactionsIf the entity does not have adequate controls to ensure that revenue transactions are recorded on a timely basis, sales may be recorded in the wrong accounting period. The entity should require that all shipping documents be forwarded to the billing function daily. The auditor can test this control by comparing the date on a bill of lading with the date on the respective sales invoice and the date the salesinvoice was recorded in the sales journal. In EarthWear’s revenue process, the shipping department forwards the approved shipping order to the billing department for entry into the billing program. In such a system, sales should be billed and recorded within one or two days of shipment. Classification of Revenue TransactionsThe use of a chart of accounts and proper codes for recording revenue transactions should provide adequate assurance about this assertion. The auditor can review the sales journal and general ledger for proper classification and can test sales invoices for proper classification by examining programmed controls to ensure that sales invoices are coded by type of product or service. Control Activities and Tests of Controls— Cash ReceiptsTransactionsTable 10– 7 summarizes the assertions for cash receipts transactions along with some examples of possible misstatements. For each of these misstatements we have included one or two possible control activities that management could implement to mitigate the risk as well as some example tests of controls that the auditor could use to test those controls. This table is not an exhaustive list of misstatements, control activities, or tests of controls for cash receipts transactions; rather, it provides some specific examples by assertion to help you understand the underlying concepts. In assessing the control risk for cash receipts transactions, the auditor follows the same decision process as described for revenue transactions. Each of the assertions shown in Table 10– 7 is discussed with an emphasis on the control activities and tests of controls. The substantive audit procedures for cash are covered in Chapter 16.