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Sale of goods and services (Revenue)
Payments received for goods and services
(Collection)
Goods returned by and claims received from
customers (Returns)
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1. Receiving customer orders
2. Authorizing credit terms and shipment
3. Confirming orders
4. Executing orders
5. Recording the shipments or services
performed
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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
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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
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3. Confirming orders Customer verification of sales order accuracy
Items
Quantities
Price
Confirm shipping date
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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
Prenumbered and controlled
Periodic reports on Open Shipments
Separation of Warehousing & Shipping
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5. Bill the customer and record the sale
Agree information on and existence ofcustomer order, sales order, and shippingreport.
Prepare a Sales Invoice
Prenumbered and controlled
Computer controls
Send sales invoice to customer
Investigation of missing or repeated documentnumbers
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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
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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
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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
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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.
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(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).
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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
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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
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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
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