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Lecture Auditing and assurance services (Second international edition) - Chapter 10: Auditing the revenue process

In this chapter, the learning objectives are: Understand why knowledge of an entity's revenue recognition policies is important to the audit, understand the revenue process, know the types of transactions in the revenue process and the financial statement accounts affected, be familiar with the types of documents and records used in the revenue process, | Auditing the Revenue Process Chapter Ten Revenue Recognition (IAS 18) Revenue is defined as the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Overview of the Revenue Process Inventory Account receivable Purchases Inventory Cash sales Cash Sale Purchases Credit sales Cash collection Credit Sale Types of Transactions and Financial Statement Accounts Affected Three types of transactions are typically processed by the revenue process: The sale of goods or rendering of a service for cash or credit. The receipt of cash from the customer in payment for goods or services. The return of goods by the customer for credit or cash. Types of Transactions and Financial Statement Accounts Affected The revenue process affects numerous accounts in the financial statements. The most significant accounts are: Flowchart of the Revenue Process: EarthWear Clothiers Flowchart of the Revenue Process: EarthWear Clothiers (continued) Flowchart of the Revenue Process: EarthWear Clothiers (continued) Types of Documents and Records Customer Sales Order Contains the details of the type and quantity of products or services ordered by the customer and customer information. Credit Approval Form For credit sales, the client must have a formal procedure for investigating the creditworthiness of the customer. Types of Documents and Records Open-Order Report A report of all customer orders for which processing has not been completed. Shipping Document This document generally serves as a bill of lading and contains information on the type of product shipped, the quantity shipped and other relevant information. Types of Documents and Records Sales Invoice The document is used to bill the customer. This document contains information on the type of product or service, the quantity, the price and the terms of trade. . | Auditing the Revenue Process Chapter Ten Revenue Recognition (IAS 18) Revenue is defined as the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Overview of the Revenue Process Inventory Account receivable Purchases Inventory Cash sales Cash Sale Purchases Credit sales Cash collection Credit Sale Types of Transactions and Financial Statement Accounts Affected Three types of transactions are typically processed by the revenue process: The sale of goods or rendering of a service for cash or credit. The receipt of cash from the customer in payment for goods or services. The return of goods by the customer for credit or cash. Types of Transactions and Financial Statement Accounts Affected The revenue process affects numerous accounts in the financial statements. The most significant accounts are: .