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Lecture Auditing and assurance services (6/e) - Chapter 7: Revenue and collection cycle

The goals of this chapter are: Identify significant inherent risks in the acquisition and expenditure cycle; describe the acquisition and expenditure cycle, including typical source documents and controls; give examples of tests of controls over purchases of inventory and services;. | Auditing & Assurance Services, 6e Chapter 07 Revenue and Collection Cycle “What at first was plunder assumed the softer name of revenue.” Thomas Paine 7- Learning Objectives Discuss inherent risks related to the revenue and collection cycle with a focus on improper revenue recognition Describe the revenue and collection cycle, including typical source documents and control procedures. Give examples of tests of controls over customer credit approval, delivery, and accounts receivable accounting 7- Learning Objectives (continued) Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period. Describe some common errors and frauds in the revenue and collection cycle, and design some audit and investigation procedures for detecting them. 7- Inherent Risks Improper Revenue Recognition Cut-off Bill and Hold Channel Stuffing Returns and Allowances Collectibility of Receivables 7- Revenue Recognition Must be (1) realized or realizable and (2) earned SEC guidance (SAB 104) Persuasive evidence of an arrangement exists, Delivery has occurred or services have been rendered, The seller's price to the buyer is fixed or determinable, and Collectibility is reasonably assured 7- REVENUE AND COLLECTION CYCLE: Key Control Procedures SEPARATION OF DUTIES Separate functions for recording, authorization, custody AUTHORIZATION OF TRANSACTIONS Write-offs EDI transactions Credit checks prior to approval of sale Pricing ACCESS TO ASSETS Shipping department Lock box account ADEQUATE DOCUMENTS AND RECORDS Pre-numbered sales orders, shipping documents (bills of lading), sales invoices Remittance advice INDEPENDENT CHECKS ON PERFORMANCE A/R subsidiary ledger to general ledger Monthly statement to customer 7- Audit Evidence in Management Reports and Data Files Pending order master file Credit check/approval files Price list master file Sales detail file . | Auditing & Assurance Services, 6e Chapter 07 Revenue and Collection Cycle “What at first was plunder assumed the softer name of revenue.” Thomas Paine 7- Learning Objectives Discuss inherent risks related to the revenue and collection cycle with a focus on improper revenue recognition Describe the revenue and collection cycle, including typical source documents and control procedures. Give examples of tests of controls over customer credit approval, delivery, and accounts receivable accounting 7- Learning Objectives (continued) Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period. Describe some common errors and frauds in the revenue and collection cycle, and design some audit and investigation procedures for detecting them. 7- Inherent Risks Improper Revenue Recognition Cut-off Bill and Hold Channel Stuffing Returns and Allowances Collectibility of Receivables