Auditing the Revenue Cycle

10 important questions on Auditing the Revenue Cycle

Steps sales process


1. Receive a customer purchase order
2. Check inventory stock status
3. Generate back order
4. Obtain credit approval
5. Prepare shipping and packing documents
6. Ship and verify shipment of goods
7. Prepare and send the invoice
8. Send monthly statement to customers
9. Receive payments

What's an important inherent risk related to revenue transactions?

The timing of revenue recognition. Complex sales transactions often make it difficult to determine when a sale has actually taken place.

What's the five-step process to recognize revenue?


1. Identify the control with the customer
2. Identify the performance obligations
3. Determine the transaction price
4. Allocate the transaction price to the deliverables
5. Recognize revenue when (or as) you satify performance obligations (by transferring the promised goods or services)
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What's the primary inherent risk associated with receivables?

The primary risk associated with receivables is that the net amount is not valid because the receivables recorded do not exist or they are not collectible from the customer.

Controls related to existence/occurrence

Controls for existence should provide reasonable assurance that a sale and accounts receivable are recorded only when revenue has been earned and the company has received cash or a collectible receivable.

What are the steps in planning analytical procedures?


1. Identify suitable analytical procedures
2. Evaluate reliability of data used to develop expectations
3. Develop expectations
4. and 5. Define and identify significant unexpected differences
6. and 7. Investigate significant and unexpected differences and ensure proper documentation

What are the two potential outcomes of the tests of controls?


1. Control deficiencies: the auditor will assess those deficiencies to determine their severity. The auditor would then modify the preliminary control risk assessment and document the implecations of the control deficiencies.

2. No control deficiencies: the auditor will likely determine that the preliminary assisment of control risk as low is still appropriate.

Revenue: existence and valuation assertions

The existence and valuation assertions are usually the most relevant for revenue accounts. Vouching a sample of recordes sales transactiosn back to customer orders and shipping documents provides support for the eistence assertion.

Revenue: completeness assertion

In testing the completeness assertion, the auditor expects the client to have used prenumbered shipping and billing documents. He selects a sample and trace them into the sales journal to obtaine vidence on whetehr the client has recorded all shipments as sales transactions in accordance with the revenue recognition accounting standards.

Revenue: cutoff issues

Additional audit attention should be given to sales transactions recorded just before and after year-end.

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