Revenue Cycle Audit Answers)

7/31/2019 Revenue Cycle Audit Answers)

1/13

AUDIT PROGRAMME REVENUE CYCLE

TEST OF CONTROLS REVENUE TRANSACTIONS

Audit Objective Audit procedure Findings

General

Validity(to find out whether

there are fictitioussales, or incidences

whereby sales isrecorded but goodsnot shipped/services

not performed)

Observe & evaluate proper segregation of duties between:

(i) shipping function & the order entry & billing functions.

(ii) credit & billing functions.

(iii) Accounts Receivable & GL functions.

(iv) cash receipts & Accounts Receivable.

Since it not possible for you to observe anything here, thinkabout why the segregation of duties is important.

Unauthorised shipments to fictitious customers without going

through the billing control procedures unrecorded salestransactions & theft of goods.

Sales can be made to customers who are not creditworthy.

Unauthorised shipments can be concealed unrecorded salestransactions & theft of goods.

Cash can be diverted & shortage of cash can be covered in the

accounting records theft.

Test 5 sales invoices and look for the relevant authorised

sales order & shipping document (bill of lading).

No exceptions noted.

Bill of lading should show references to sales invoice.Review & test client procedures for accounting fornumerical sequence of sales invoices.

Your lecturer is the client. Ask her what are the clientprocedures in accounting for numerical sequence of sales

invoices.

Lecturers response: Sales invoices are pre-printed with fixed

serial numbers. The serial numbers are controlled by the SalesManager and the Finance Manager so that numbers do not

repeat.

Reduces the risk of fraudulent sales invoices or missing salesinvoices that are misused.

Review & test client procedures for mailing & handlingcomplaints about monthly customer statements. Your lecturer is the client. Ask her about this matter.

Lecturers response: The monthly customer statements aregenerated from the Accounts Receivable Subsidiary Ledger andsent to the customers by the 1st of the following month. If theycomplain about a balance, the Accounts Receivable dept

together with the Sales & Billing depts will investigate thematter.

Reduces the risk of revenue being recorded before goods areshipped/services performed, as customers are unlikely torecognise an obligation to pay they will complain.


2/13


TEST OF CONTROLS REVENUE TRANSACTIONS (Contd.)


Completeness(to find out whetherthere are any

incidences wheregoods areshipped/services

performed butrevenue not recorded)

Review & test clients procedures for accounting fornumerical sequence of shipping documents & sales invoices.

You have already performed this test for sales invoices above.Just perform the test for shipping documents.

Trace a sample of shipping documents (e.g. bill of lading)

to their respective sales invoices & to the sales journal.

Use the shipping documents & sales invoices that you have on

hand. Trace to sales journal for Feb 2006.


Test a sample of daily reconciliations between sales invoicesto daily sales report.

Trace sales invoices for 5 Feb 2006 to the relevant Daily SalesReport.


Examine the open-order file for unfilled orders older than 2months.

Assume that there are no unfilled orders more than 2 months.But think of why this step is important.

To prevent sales from being undertaken up. Sales orders which

are unfilled means that goods have not been shipped out &sales invoices not issued.

Timeliness(to avoid revenuetransactions frombeing recorded in the

wrong period)

Compare the dates on sales invoices with the dates of therelevant shipping documents.

Must have a minimum delay.


Compare the dates on the sales invoices to the dates they

were recorded in the sales journal.

Must have a minimum delay.



3/13


TEST OF CONTROLS REVENUE TRANSACTIONS (Contd.)


Authorisation

(to avoid incidenceswhere goods are

shipped/servicesperformed for a

customer who is a badcredit risk; to avoid

shipments/servicesperformed atunauthorised prices oron unauthorised

terms)

Review the clients procedures for granting credit to

customers.

Your lecturer is the client. Ask her about this matter.

Lecturers response: When sales order is received, the order is

passed to the Finance Manager for credit approval. The FinanceManager will review the customers credit rating with the

company. If it is positive, then credit approval will be given.

Examine sales orders for evidence of credit approval. No exceptions noted.

Ensure that all shipping documents are accompanied byauthorised sales orders.

You have already performed this test above.

Authorisation

Valuation

Compare prices/terms on sales invoices to authorised price

list & terms of trade.


Valuation

(to ensure that salestransaction is recordedat the correct amount)

Examine the sales invoice for evidence that a client

personnel verified mathematical accuracy (look for theinitials of the staff who did the verification).


Recompute the information on a sample of 5 sales invoices. No exceptions noted.

Classification(to ensure that the

sales transaction isproperly classified)

Review the sales journal & general ledger for properclassification of accounts.


Examine sales invoices for proper classification. No exceptions noted.

Posting &summarisation(to ensure correctposting to sales

journal or customersaccounts in the

Accounts Receivablesubsidiary ledger, andfrom sales journal tothe general ledger)

Examine the reconciliation of sales invoices to daily salesreport.

You have already performed this above.

Examine the reconciliation of entries from sales journal toAccounts Receivable subsidiary ledger.


Review the reconciliation of Accounts Receivable subsidiaryledger to general ledger control account.

Credit Memo C01231 re: sales return by Steven Spielsberg hasnot been recorded in the general ledger.

Review & test client procedures for mailing & handlingcomplaints related to monthly customer statements.



4/13


TEST OF CONTROLS CASH RECEIPT TRANSACTIONS

Audit objective Audit procedure Findings

Validity

(to avoid incidenceswhereby cash receipts

are recorded, but notreceived or deposited

in the bank account)

Completeness

Observe & evaluate the proper segregation of duties

between the cash receipts & Accounts Receivables function.

Since it not possible for you to observe anything here, think

about why the segregation of duties is important.

Otherwise, staff could receive money, pocket it. When nextdebtor pays up, he records the receipt in the cash account AND

applies that receipt against Customer 1s account (DrCash/Bank; Cr A/cs Receivable). No complaints from the AR

debtor since receipt is taken up, and the books still balance(this is called lapping). The staff will shift the difference fromDebtor to Debtor.

Review monthly bank reconciliations to ensure that they

have been independently reviewed.

For our exercise, use only 1 bank reconciliation, i.e. bank

reconciliation statement for Standard Chartered Bank Malaysia(Feb 2006) only.


Completeness

(to ensure that cashreceipts are not stolenor lost before being

recorded)

Ensure that all cheques received are payable in the name of

the company (crossed Account Payee Only).

Use cheques received for March 2006 only.

No exceptions noted. In real life, these cheques would havebeen already banked-in.

Examine daily pre-listing of cash receipts. Use the pre-listing for 15 March 2006.


Test the reconciliation of daily cash receipts with posting to

Accounts Receivable subsidiary ledger.

For daily cash receipts, you may refer to the pre-listing for 15

March 2006. Trace to available Accounts Receivable from theAccounts Receivable Subsidiary Ledger only.


Inquire of client personnel about the handling of monthlycustomer statements & the examination of resolution of

complaints.


Timeliness(to ensure that cashreceipts are not

recorded in the wrongperiod)

Examine cash receipts to see whether they are depositedinto the bank daily.

Use the daily pre-listing of cash receipts dated 15 March 2006.For banking in, refer to the relevant bank deposit slip.

Noted that cash receipts are deposited into the bank 3 daysafter receipt (18.3.2006) not very timely.

Authorisation

(to ensure that cashdiscounts are properlygiven)

Test a sample of cash receipts transactions for proper cash

discounts.

No discounts were given.


5/13


TEST OF CONTROLS CASH RECEIPT TRANSACTIONS (Contd.)


Valuation(to ensure that cashreceipts are recorded

at the proper amount)

Review & test that the daily remittance report is reconciledto the control listing of remittance advices.

Use Daily Remittance Report for 18 March 2006.


Review monthly bank reconciliations to ensure that theyhave been independently reviewed.


Classification(to ensure that cashreceipts are recorded

in the correct account)

Trace cash receipts from the cash receipts listing to thecash receipts journal for proper classification.

Use the daily pre-listing of cash receipts dated 15 March 2006 &trace to cash receipts journal for March 2006.


Review the cash receipts journal for unusual items. No exceptions noted.

Posting &

5uthorized5d5(to ensure that cashreceipts are posted to

the right customeraccount, and properly

posted to the rightgeneral ledgeraccounts)

Review & test the daily reconciliation of daily remittance

report with postings to the cash receipts journal & AccountsReceivable subsidiary ledger.

Use Daily Remittance Report for 18 March 2006, trace to cash

receipts journal for March 2006 and the Accounts Receivablesubsidiary ledger that you have already obtained.

No exceptions noted. (Traced only the transaction with StevenSpielberg on AR sub ledger.)

Review & test client procedures for mailing & handlingcomplaints related to monthly customer statements.


Review the posting from the cash receipts journal to thegeneral ledger.


Examine the reconciliation of Accounts Receivablesubsidiary ledger to the general ledger.



6/13


TEST OF CONTROLS SALES RETURNS & ALLOWANCES TRANSACTIONS


Validity Ensure that the credit memorandum (for returned goods or

discounts allowed or bad debts written off) is approved by aperson other than the personnel who initiated it.

Ask for the credit memoranda for returned goods.

No exceptions noted for approval of credit memo wrt Steven

Spielbergs return.

However, no receiving document attached to the credit memofor returned goods by Angelina Jolie. Also note that the credit

memo is not 6uthorized.

Goods Returns Clerk colludes with the Cash Receipts Clerk. Ms.Angelina Jolie had paid RM6,500.00 as full repayment for Sales

Invoice No. 238902. The Cash Receipts Clerk took the cash butdid not record it in the Prelisting of Cash Receipts. As a result

the cash receipt was not taken up in the Cash Receipts Journal.

At the same time, the Returns Clerk issued a Credit Memo

addressed to Ms. Angelina Jolie, but did not physically send it toher.

Auditors: Will find that there is no Goods Return Note forreturned goods, because the goods were never returned.

[Credit memoranda can be used to cover 6uthorized6dshipments of goods or conceal a misappropriation of cash. E.g.when a staff ships goods/steals cash, he applies a credit

memorandum against the relevant Accounts Receivablesubsidiary ledger. The debtors account balance is therefore

correct, and there will be no complaints.]

Ensure that a credit memorandum for returned goods issupported by a receiving document indicating that goods

have been returned.


7/13


SUBSTANTIVE PROCEDURES TRANSACTIONS RELATED TO ACCOUNTS RECEIVABLE


Validity For a sample of sales transactions recorded in the sales

journal, trace sales invoices back to sales orders & shippingdocuments.


Completeness Trace a sample of shipping documents to the details of thesales invoices & to the sales journal & customers Accounts

Receivable subsidiary ledger.


Cut-off Compare the dates on a sample of sales invoices with theshipment dates and with the dates they are recorded in thesales journal.

Use the sales invoices, bills of lading & sales journal that youalready have.


Valuation Compare prices & terms on a sample of sales invoices with

the 7uthorized price list & terms of trade.


Accuracy For a sample of sales invoices, test posting to the salesjournal & Accounts Receivable subsidiary ledger for thecorrect amounts.


SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS


Revenue

To find out anyunrecorded/understated/fictitious

revenue

Compare the gross profitpercentage by product line withprevious years & industry data.

No need to compare for industry data.

See Appendix A.

GP margin has remained reasonably consistent.

Compare sales by month (by

product line) over the year.

See Appendix B.

Tub ice-cream

sales increased in February, when Bestmart Hypermarket had a Special Sale and

purchased extra stocks. in May, King Bee made a big purchase of RM550K in the setting up of its retail shop.Sales of RM66K also made to Tong Hing Supermarkets because of its Dairy Products

Campaign during that month.

General increase in December because of sales to supermarkets/stores in anticipation

of the Christmas/New Year sale.

Cone ice-cream sales increased July onwards because of the installation of a newrollercoaster ride The Terminator.


8/13


SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS (Contd.)


To find out any

changes in pricepolicies, productpricing problems

Compare reported revenue to

budgeted revenue.

Assume none.

Compare individual customer

balances over RM100,000 withprevious years.

See Accounts Receivable Trial Balance.

No major variance as compared to 2005, except for the balance due from King Bee

Retail Shop which has increased by about RM700K. The reason for this is that King BeeRetail Shop, which is a business owned by the director Wong King Bee, started tradingextensively in 2006, and hence receivables have increased in 2006.

Accounts Receivable , provision for doubtful debts, bad debts

expense

To find out any

under/over statementof provision fordoubtful debts & baddebt expense

Compare receivables turnover &

days outstanding in AccountsReceivable to previous yearsand/or industry data.


See Appendix E.

Increase of number of days receivables outstanding from 116 to 153 days due

mainly to the increase in balance due from King Bee Retail Shop. A large part of thebalance outstanding has not been repaid as at 31.12.2006.

Compare aging categories on agedtrial balance of Accounts Receivableto previous years.

See Accounts Receivable Trial Balance.

In 2005, debtors repaid the outstanding balances faster. Note that there nooutstanding balances which were more than 6 months as it was the policy of thecompany to charge interest of 2% on outstanding balances after 6 months.

2006:

King Bee Retail Shop started trading extensively only in 2006. Because it is a director-owned business, there is a special trade relationship whereby the company allows it a

looser credit period.

Compare bad debt expense as a %

of revenue to previous yearsand/or industry data.


See Appendix D.

Bad debt expense have remained consistent from that of previous year.

Compare provision for doubtfuldebts as a % of AccountsReceivable or credit sales to

previous years and/or industrydata.

No need to compare for industry data.Also, in this case, assume that credit sales = total gross sales.

See Appendix F.Allowance for uncollectible accounts & charge-off of uncollectible accounts have

remained reasonably consistent from that of previous year.Compare bad debt expense as a %of Accounts Receivable or creditsales to previous years and/orindustry data.

Examine large customer accountsindividually & compare to previous

year.

To check for any long outstanding balances.None noted.


9/13


SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS (Contd.)


Sales returns, allowances, sales commissions

Under/over statementof sales returns

Compare sales returns &allowances as a percentage of

gross sales with previous years (byproduct line).

See Appendix C.

Sales returns & allowances have remained consistent from that of previous year.

Note that there are no sales returns/allowances for cone ice-creams ice-creams soldin the park are never returned, and discounts are never asked for.

Under/over statementof sales discounts

Compare sales discounts as a % ofrevenue to previous years and/or

industry data.

See Appendix G.

Sales discounts have remained consistent from that of previous year.

Under/over statement

of sales commissionexpense & relatedaccrual

Estimate sales commission expense

by multiplying net revenue byaverage commission rate &compare recorded salescommission expense.

No need to do this.

SUBSTANTIVE PROCEDURES TEST OF BALANCES FOR ACCOUNTS RECEIVABLE & PROVISION FOR DOUBTFUL DEBTS & BADDEBT EXPENSE


Validity Review Accounts Receivable Trial Balance for large and

unusual receivables.

Unusual receivable the large overdue balance due from King

Bee Retail Shop.

King Bee Retail Shop is owned by one of the directors of IceCream Paradise. Hence it is a related party balance.

Confirm Accounts Receivable, using positive confirmations.Confirm all amounts over RM100,000.

Obtain the standard confirmation form as used by auditors.Decide on which amounts you will need to send confirmation

requests to. Review the confirmation request to see how youcan fill it.

Perform alternative procedures for all confirmations notreturned on the 1st/2nd request.

(a) Check for subsequent cash receipts after year end.(b) Verify items making up the receivables to sales

invoices/shipping documents/official receipts.

Refer to Accounts Receivable Subsidiary Ledger.

You will not need to do verification of items for this exercise.Lecturer will explain.

All debtors show receipts after the year end (means they areactive debtors) except for King Bee Retail Shop & Kedai RuncitAhmad.

Completeness Obtain the aged Accounts Receivable Trial Balance. Agreethe total to the general ledger.

The General Ledger is not provided to you in this exercise.Assume that the totals agree.


10/13


SUBSTANTIVE PROCEDURES TEST OF BALANCES FOR ACCOUNTS RECEIVABLE & PROVISION FOR DOUBTFUL DEBTS & BADDEBT EXPENSE


Cut-off Select the last 4 sales transactions from the current yearssales journal and the first 4 from the subsequent years.Trace each sales transaction to their shipping/deliverydocuments, checking for the date of actual delivery & the

correct recording.

All transactions can be traced to delivery documents and areproper.

Review the sales journal for large sales returns &allowances before and after the balance sheet date.

Determine whether they are recorded in the correct period.

Sales returns/allowances have been recorded in the correctperiod.

Ownership Review the minutes of the board of directors meetings andinquire of management to determine whether any

receivables are pledged/factored.

Minutes show that the BOD has approved to pledge its tradereceivables in order to secure a term loan from BCB. However,

will need to follow up on subsequent minutes to see whetherthis was actually done. Also to look at term loan agreement,letter of pledge, etc if/when term loan is actually obtained.

Review bank confirmations for any liens on receivables. Assume that bank confirmation reply from BCB confirms the

above.

Accuracy Obtain the aged Accounts Receivable trial balance.Agree the total to the general ledger.


Trace selected items from the aged Accounts Receivable

trial balance to the Accounts Receivable subsidiary ledgers& sales invoices for proper amount & aging.

For this exercise, no sales invoices are provided. Therefore,

assume that items on the Accounts Receivables SubsidiaryLedger can be properly traced to sales invoices.

All accounts should be correctly traced.

Obtain an analysis of the provision for doubtful debts & baddebt expense.

Trace the totals to the general ledger.Trace the individual items to Accounts Receivable subsidiary

ledgers.

Assume that all items & totals trace correctly.


11/13


SUBSTANTIVE PROCEDURES TEST OF BALANCES FOR ACCOUNTS RECEIVABLE & PROVISION FOR DOUBTFUL DEBTS & BADDEBT EXPENSE (Contd.)


Valuation Examine the results of the confirmation of AccountsReceivables.

In this examination, we are examining whether the amountsconfirmed agree with the amounts in the Accounts ReceivableSubsidiary Ledger. If the amounts dont agree, then we wouldneed to investigate the difference.

For this exercise, assume that all agree.

Discuss with the credit manager the likelihood of collecting

older accounts. Examine subsequent cash receipts & thecredit file on all larger accounts over 90 days & evaluatewhether the receivables are collectible.

All receivables appear to be collectible as there were

subsequent receipts after the year end, except for that of KingBee Retail Shop.

However, as King Bee is a related party balance with specialcredit terms, the directors of the company were of the opinion

that the amount remains recoverable. [However, to debatethis.]

Evaluate whether the allowance is adequate after

performing other audit procedures for collectibility ofreceivables.

Use own judgement.

Classification Review the receivables listed on the aged trial balance formaterial credits, long-term receivables & non-trade

receivables.

None noted.

Disclosure Inquire whether there are any related party receivables.Ensure that they are properly disclosed.

King Bee Retail Shop is owned by one of the directors of IceCream Paradise. Hence it is a related party balance.

Review receivables listing for any accounts that have beenpledged, assigned or discounted.

You will need to ask the client about this.

None pledged other than that mentioned in the BOD minutes(pledged to BCB).


12/13


Sales 1,219,794.00 1,036,824.90 356,987.00 273,645.00 1,576,781.00 1,310,469.90

Gross profit 731,876.40 622,094.94 178,493.50 136,822.50 910,369.90 758,917.44

GP margin 60% 60% 50% 50% 58% 58%

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Total

Tub ice-cream -

Monthly sales for

2006 4,604 150,987 - - 663,568 - 67,000 25,000 - 74,820 28,500 205,315 1,219,794

Cone ice-cream -

Monthly sales for

2006 10,368 11,620 9,687 9,871 10,300 10,231 51,226 56,784 53,213 49,031 45,654 39,002 356,987

Sales 1,219,794.00 1,036,824.90 356,987.00 273,645.00 1,576,781.00 1,310,469.90

Sales returns & allowances 60,989.70 51,841.25 - - 60,989.70 51,841.25

5% 5%

Sales 1,576,781.00 1,310,469.90

Bad debt expense 78,839.05 65,523.50

5% 5%


13/13


Sales 1,576,781.00 1,310,469.90

Accounts receivables 1,023,313.00 300,629.00 536,245.00

Average receivables 661,971.00 418,437.00

No. of days receivables outstanding (days) 153.24 116.55

Sales 1,576,781.00 1,310,469.90

Accounts receivables 1,023,313.00 300,629.00

Provision for doubtful debts 10,233.13 3,006.29

- as % of credit sales 0.65% 0.23%

- as % of Accounts Receivables 1.00% 1.00%

Bad debts written off 5,233.13 1,550.31

- as % of credit sales 0.33% 0.12%

- as % of Accounts Receivables 0.51% 0.52%

Sales 1,576,781.00 1,310,469.90

Sales discounts 70,955.15 60,281.62

Sales discounts as % of revenue 4.50% 4.60%

Documents

Revenue Cycle Audit Answers)