Revenue_Process

7/29/2019 Revenue_Process

1/17

1


2/17

2

Sale of goods and services (Revenue)

Payments received for goods and services

(Collection)

Goods returned by and claims received from

customers (Returns)


3/17

3

1. Receiving customer orders

2. Authorizing credit terms and shipment

3. Confirming orders

4. Executing orders

5. Recording the shipments or services

performed


4/17

4

1.Receiving customer orders

Computer controls:

Customer checks

Valid customer number

Self-check algorithm

Field checks Key characteristics

Completeness of required fields

Reasonableness checks

Order quantities

Product combinations

Clear procedures for resolving computer red flags

Periodic reports on Open Orders


5/17

5

2. Authorizing credit terms and shipment Computer controls

Credit check for repeat customers

Inventory availability

Credit review for new customers

Credit worthiness

Existence

Separation of Credit & Sales Departments When approved a Sales Order is produced

Prenumbered and controlled


6/17

6

3. Confirming orders Customer verification of sales order accuracy

Items

Quantities

Price

Confirm shipping date


7/177

4. Executing orders

Assembling goods for shipment

Picking list (sales order)

Verify items picked and update inventory

Move items to shipping dock

Ship ordered goods

Packing slip (sales order)

Verify items packed (agree picking & sales order)

Shipping report and bill of lading


Periodic reports on Open Shipments

Separation of Warehousing & Shipping


8/178

5. Bill the customer and record the sale

Agree information on and existence ofcustomer order, sales order, and shippingreport.

Prepare a Sales Invoice


Computer controls

Send sales invoice to customer

Investigation of missing or repeated documentnumbers


9/179

1. Develop an expectation concerning total revenues andgross margin based on general economy, competitive

environment, and market position.

2. Identify and understand difficult revenue recognition

issues:

Long-term construction/contracts

Bundled services/revenues

Potential for unearned revenue and collectiondifficulties


10/1710

1. General incentive to overstate revenues andreceivables

2. High volume of transactions

3. Efforts to increase customer value, may increaseaccounting complexity:

Bundled services

Rights of return

Financing options


11/1711

1. Integrity & Ethical Values

2. Management Aggression

Revenue and profit centered incentives

Revenue recognition policies

3. Competence and Commitment

Various control responsibilities

Accounting personnel

Audit committee/BOD

1. What has been identified and what actions have been taken?

Changes to the environment (Competition, Regulation, Reporting Req.)?

Additional monitoring, training, incentives, or reports?

1. Verify that monitoring activities are operating effectively.

2. Consider any problems uncovered that could impact the audit of revenues:

Billing errors

Regulatory inquiry

Actions to address previous auditor concerns


12/1712

Recorded sales represent goods shipped during the period.

All sales made during the period were recorded.

All sales are accurately valued using GAAP and correctly journalized, summarized,

and posted.

All sales have been recorded in the correct accounting period.

All sales have been recorded in the proper accounts.

Accounts receivable represents amounts owed by customers on the balance sheet

date.

Accounts receivable includes all claims on customers at the balance sheet date.

Accounts receivable at the balance sheet date represents legal claims of

the entity on customers for payment.

Accounts receivable represent gross claims on customers at the balance

sheet date, and agrees with the sum of the accounts receivable subsidiary ledger.


13/1713

(Overstatement)

A single sales invoice recorded twice or a cancelled sales invoice recorded. Fictitious customer and sale recorded.

Shipments without the consent and agreement of the customer.

The earnings process is not complete:

Recording a sale before shipment or other prerequisites of being earned.

Unearned revenue recorded as earned.

The amount may not be realizable: Substantial uncertainty exists about collectibility.

Customer obligations are contingent on other actions (financing, resale, etc.).

(Understatement)

Shipped orders have not been billed and recorded.

Transactions are recorded for incorrect amounts (Over- and Understatements).

Books left open too long (Overstatement) or closed too early (Understatement).

Transactions are recorded in incorrect accounts (Over- and Understatements).


14/17

14

Sales invoice sequencing (double entry)

Customer validity check (not fictitious) Authorized customer order and shipping document (not fictitious & earning process complete)

Credit check (collectibility)

Prenumbered and controlled documents

Computer input controls

Authorized customer order and shipping document (independent agreement)

Posting and updating of accounts done automatically through computer technology

Prenumbered and controlled documents

Periodic review of Open files

Computer input controls


15/17

15

Occurrence

Computer-assisted auditing techniques

(CAATs)

Examine Sales Invoice packets for

supporting documentation

Review sequence of sales invoices

Review journal for unusual transactions

Vouch from the sales journal to the

supporting documents

Completeness

Account for sequence of shipping

documentsObserve and review evidence for

document control

Trace from the shipping documents to thesales journal

Accuracy

CAATs

Confirm agreement between supporting

documentation sources

Recalculate prices and extensions on sales

invoice

Trace a few transactions from inception to

completion

Cutoff

Account for sequence of supporting

documents.

Confirm period reviews of open files

Analyze Sales Invoices and Shipping

Documents close to year end to confirm

appropriate recording

Classification CAATs

Trace transactions from Sales Invoice to the

Sales Journal, verifying appropriate

classification


16/17

16

Existence Compare gross margins w/ prior years

Consider monthly sales over time

Compare A/R turnover w/prior years

Review subsidiary ledger for unusualamounts

Confirm receivables

Alternative procedures

Completeness Trace from the A/R master to the aging

schedule

Rights &

Obligations

Review BOD minutes for A/R pledging or

factoring

Review material sales contracts for terms

and conditions

Inquire of management

Valuation &

Allocation

Compare bad debts to prior years

Compare allowance account to prioryears

Compare A/R turnover w/ prior years

Compare amounts in aging categories w/

prior years

Inquire as to likelihood of collection for

older accounts

Assess appropriateness based on

independent estimates and other

knowledge obtained regarding collection


17/17

17