Revenue Cycle Audit Answers)
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Transcript of Revenue Cycle Audit Answers)
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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.
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7/31/2019 Revenue Cycle Audit Answers)
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AUDIT PROGRAMME REVENUE CYCLE
TEST OF CONTROLS REVENUE TRANSACTIONS (Contd.)
Audit Objective Audit procedure Findings
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.
No exceptions noted.
Test a sample of daily reconciliations between sales invoicesto daily sales report.
Trace sales invoices for 5 Feb 2006 to the relevant Daily SalesReport.
No exceptions noted.
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.
No exceptions noted.
Compare the dates on the sales invoices to the dates they
were recorded in the sales journal.
Must have a minimum delay.
No exceptions noted.
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7/31/2019 Revenue Cycle Audit Answers)
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AUDIT PROGRAMME REVENUE CYCLE
TEST OF CONTROLS REVENUE TRANSACTIONS (Contd.)
Audit Objective Audit procedure Findings
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.
No exceptions noted.
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).
No exceptions noted.
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.
No exceptions noted.
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.
No exceptions noted.
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.
You have already performed this above.
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7/31/2019 Revenue Cycle Audit Answers)
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AUDIT PROGRAMME REVENUE CYCLE
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.
No exceptions noted.
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.
No exceptions noted.
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.
No exceptions noted.
Inquire of client personnel about the handling of monthlycustomer statements & the examination of resolution of
complaints.
You have already performed this above.
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.
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7/31/2019 Revenue Cycle Audit Answers)
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AUDIT PROGRAMME REVENUE CYCLE
TEST OF CONTROLS CASH RECEIPT TRANSACTIONS (Contd.)
Audit objective Audit procedure Findings
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.
No exceptions noted.
Review monthly bank reconciliations to ensure that theyhave been independently reviewed.
You have already performed this above.
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.
No exceptions noted.
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.
You have already performed this above.
Review the posting from the cash receipts journal to thegeneral ledger.
No exceptions noted.
Examine the reconciliation of Accounts Receivablesubsidiary ledger to the general ledger.
You have already performed this above.
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7/31/2019 Revenue Cycle Audit Answers)
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AUDIT PROGRAMME REVENUE CYCLE
TEST OF CONTROLS SALES RETURNS & ALLOWANCES TRANSACTIONS
Audit objective Audit procedure Findings
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.
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7/31/2019 Revenue Cycle Audit Answers)
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AUDIT PROGRAMME REVENUE CYCLE
SUBSTANTIVE PROCEDURES TRANSACTIONS RELATED TO ACCOUNTS RECEIVABLE
Audit objective Audit procedure Findings
Validity For a sample of sales transactions recorded in the sales
journal, trace sales invoices back to sales orders & shippingdocuments.
You have already performed this test above.
Completeness Trace a sample of shipping documents to the details of thesales invoices & to the sales journal & customers Accounts
Receivable subsidiary ledger.
You have already performed this test above.
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.
No exceptions noted.
Valuation Compare prices & terms on a sample of sales invoices with
the 7uthorized price list & terms of trade.
You have already performed this test above.
Accuracy For a sample of sales invoices, test posting to the salesjournal & Accounts Receivable subsidiary ledger for thecorrect amounts.
No exceptions noted.
SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS
Audit objective Audit procedure Findings
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.
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7/31/2019 Revenue Cycle Audit Answers)
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AUDIT PROGRAMME REVENUE CYCLE
SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS (Contd.)
Audit objective Audit procedure Findings
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.
No need to compare for 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.
No need to compare for 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.
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7/31/2019 Revenue Cycle Audit Answers)
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AUDIT PROGRAMME REVENUE CYCLE
SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS (Contd.)
Audit objective Audit procedure Findings
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
Audit objective Audit procedure Findings
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.
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7/31/2019 Revenue Cycle Audit Answers)
10/13
AUDIT PROGRAMME REVENUE CYCLE
SUBSTANTIVE PROCEDURES TEST OF BALANCES FOR ACCOUNTS RECEIVABLE & PROVISION FOR DOUBTFUL DEBTS & BADDEBT EXPENSE
Audit objective Audit procedure Findings
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.
You have already performed this above.
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.
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7/31/2019 Revenue Cycle Audit Answers)
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AUDIT PROGRAMME REVENUE CYCLE
SUBSTANTIVE PROCEDURES TEST OF BALANCES FOR ACCOUNTS RECEIVABLE & PROVISION FOR DOUBTFUL DEBTS & BADDEBT EXPENSE (Contd.)
Audit objective Audit procedure Findings
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).
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7/31/2019 Revenue Cycle Audit Answers)
12/13
AUDIT PROGRAMME REVENUE CYCLE
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%
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7/31/2019 Revenue Cycle Audit Answers)
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AUDIT PROGRAMME REVENUE CYCLE
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%