...While reviewing Apollo Shoes’ revenue cycle, we tested 120 sales transactions and discovered 51 deviations. This significant number of deviations could potentially indicate more serious shortcomings in the system of internal controls surrounding the revenue cycle and highlights areas that will require more careful scrutiny throughout the audit. The most common type of deviation noted was the lack of the expected credit approval notation on the transaction documents. In fact, 31 of the 51 total deviations resulted from the lack of credit approval. Of the 31 “No credit approval” sales, 10 are still recorded as “unpaid” (ICC-2). This seemingly regular ignorance of a credit approval in the revenue cycle suggests that Apollo might experience above average difficulty with accounts receivable collections. As a result, it is important that the audit procedures for the allowance for doubtful accounts be strengthened to ensure the reasonableness of the company’s A/R assumptions. Errors in billing accounted for 17 of the 51 total deviations. Generally, errors in billing are expected to be a mixture of overcharges and undercharges. However, all 17 of the billing error deviations discovered in this sample of transactions were attributable to overcharges (ICC-2). This seems to indicate a specific breakdown in the internal controls system as it relates to transaction quantity and price data entry. Due to the volume of overcharges, revenues and accounts receivable could be overstated...
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...Audit Program Design Part III Inventory and Warehouse Cycle The inventory and warehouse cycle can be divided into five sections: acquire and record raw materials, labor, and overhead, internally transfer assets and costs, ship goods and record revenue and costs, physically observe inventory, and price and compile inventory. The following will be the tests of control, substantive tests of transactions, and analytical procedures. 1. Acquire and record raw materials, labor, and overhead a. Tests of control i. Check to make sure that all materials ordered have been accounted for ii. Check to make sure that there are records for all orders iii. Check payroll from payroll and personnel cycle iv. Check to make sure that the inventory is not overstocked b. Substantive test of transactions i. Take a sample of the orders placed ii. Make sure that the sample reflects that all material were received iii. Sample the payroll to make sure there are no discrepancies iv. Sample the inventory to make sure that it is replenished and constantly moving c. Analytical procedures i. Compare the results to prior years to ensure that the data matches up ii. Determine if there any risks 2. Internally transfer assets and costs a. Tests of controls i. Check financial statements to ensure assets were transferred ii. Check for the costs related to the business b. Substantive tests of transactions i. Take a sample of the financial...
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...07 Revenue and Collection Cycle “What at first was plunder assumed the softer name of revenue.” Thomas Paine 7-2 Learning Objectives 1. Discuss inherent risks related to the revenue and collection cycle with a focus on improper revenue recognition 2. Describe the revenue and collection cycle, including typical source documents and control procedures. 3. Give examples of tests of controls over customer credit approval, delivery, and accounts receivable accounting 7-3 Learning Objectives (continued) 4. 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. 5. Describe some common errors and frauds in the revenue and collection cycle, and design some audit and investigation procedures for detecting them. 7-4 Overall Audit Approach 7-5 Inherent Risks • Improper Revenue Recognition – Cut-off – Bill and Hold – Channel Stuffing • Returns and Allowances • Collectibility of Receivables 7-6 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 7-7 7-8 Exhibit 7.2 Revenue Recognition Rogues 7-8 Exhibit 7.3 Revenue and Collection Cycle 7-9 REVENUE AND...
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...AUDIT SCOPE: Sales/revenue and collection cycle Payroll and personnel cycle Acquisition and payment cycle All Transactions, orders, and payments processed January 1, 2007 through December 31, 2007 AUDIT OBJECTIVES: • To determine internal control compliance to sub objectives for payroll and personnel cycle, sales/revenue and collection cycle, and the acquisition and payment cycle. • To obtain control evidence and documentation about the existence, accuracy, classification, timing and completeness of recorded acquisition transactions. CRITERIA: Statement on Auditing Standards (SAS) No. 99 – Fraud Auditing Standards AUDITOR ASSIGNMENTS: John Butler – Sales and Collection David Sargent – Payroll and Personnel Perry Boydstun – Acquisition and Payment Cycle METHODOLOGY: Each auditor will perform their assigned area of tests of controls and substantive test using sampling techniques as appropriate. Strengths and weaknesses’ should be denoted by using a “S” or “W” on each area applicable area of the flowchart and checklist of each assigned area. The summary status (“Ss” and “Ws”) will be listed in the bridge worksheet for SOX 404 Audit analysis. Bridge Worksheet for Sales and Collection Cycle – SOX 404 Audit Public companies typically rely heavily on proper internal controls to maintain an effective sales and collection cycle. As such, AOW will need to expand the substantive tests of transactions to include tests on controls. First of all, it is...
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...CHAPTER 10 Auditing Revenue and Related Accounts 1 Explain the concept of accounting cycles and their impact on audit approaches, and identify the accounts in the revenue cycle. 2 Discuss the importance of proper revenue recognition and the characteristics of revenuerelated fraud. 3 Describe the major types of fraud and misstatements that have occurred in the revenue accounts. 4 Describe how to use analytical procedures to identify possible misstatements in the revenue cycle. 5 Assess inherent and control risk regarding revenue cycle accounts. 6 Use audit procedures to test the effectiveness of controls in the revenue cycle. 7 Link the auditor’s control risk assessment to the development of substantive tests of accounts in the revenue cycle. 8 Describe the factors that influence the effectiveness and efficiency of audits of account balances. 9 Apply auditing concepts to test revenue. 10 Apply auditing concepts to test accounts receivable. 11 Describe fraud indicators in the revenue cycle and related audit procedures. 12 Evaluate the adequacy of a client’s allowance for doubtful accounts. Th om so n LEARNING OBJECTIVES Le ar ni ng ™ The overriding objective of this textbook is to build a foundation to analyze current professional issues and adapt audit approaches to business and economic complexities. Through studying this chapter, you will be able to: CHAPTER OVERVIEW This chapter illustrates the audit concepts developed in Chapters...
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...Keisha Porter ACCT330-1402A-01 Phase 1 Individual Project Professor Sandra Frempong April 14, 2014 The revenue cycle is the set of activities in a business which brings about the exchange of goods or services with customers for cash and most business transactions are conducted on a credit basis because the cash is not received until after the goods have been shipped to the customers (accounting notes, 2014). For someone to be able to figure out the accounts that a company may use in their business for their revenue cycle you will have to do a corporate general ledger. This will be what the company uses to be able to record all of their financial items and the actual accounting data summaries. There are a number of different accounts that are involved when it come to the revenue cycle. The accounts are sales of goods, provision of services, discounts and rebate from vendors and service providers, gains from marketable securities as varies, stocks, bonds, and derivatives (accounts-generally-included-revenue-cycle-company, 2014). Revenue generally is realized and earned when certain guidelines are recognition and certain criterion has been met. The first thing is there has to be some persuasive evidenced of an arrangements has been set in place and that it does exists. The next thing is that the customer’s has received their products or services already and they have been rendered. Then the next step is that the seller has a fixed price to their buyers that has already...
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...AUDIT SCOPE: Sales/revenue and collection cycle Payroll and personnel cycle Acquisition and payment cycle All Transactions, orders, and payments processed January 1, 2007 through December 31, 2007 AUDIT OBJECTIVES: • To determine internal control compliance to sub objectives for payroll and personnel cycle, sales/revenue and collection cycle, and the acquisition and payment cycle. • To obtain control evidence and documentation about the existence, accuracy, classification, timing and completeness of recorded acquisition transactions. CRITERIA: Statement on Auditing Standards (SAS) No. 99 – Fraud Auditing Standards AUDITOR ASSIGNMENTS: John Butler – Sales and Collection David Sargent – Payroll and Personnel Perry Boydstun – Acquisition and Payment Cycle METHODOLOGY: Each auditor will perform their assigned area of tests of controls and substantive test using sampling techniques as appropriate. Strengths and weaknesses’ should be denoted by using a “S” or “W” on each area applicable area of the flowchart and checklist of each assigned area. The summary status (“Ss” and “Ws”) will be listed in the bridge worksheet for SOX 404 Audit analysis. Bridge Worksheet for Sales and Collection Cycle – SOX 404 Audit Public companies typically rely heavily on proper internal controls to maintain an effective sales and collection cycle. As such, AOW will need to expand the substantive tests of transactions to include tests on controls. First of all, it is...
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...AUDIT SCOPE: Sales/revenue and collection cycle Payroll and personnel cycle Acquisition and payment cycle All Transactions, orders, and payments processed January 1, 2007 through December 31, 2007 AUDIT OBJECTIVES: • To determine internal control compliance to sub objectives for payroll and personnel cycle, sales/revenue and collection cycle, and the acquisition and payment cycle. • To obtain control evidence and documentation about the existence, accuracy, classification, timing and completeness of recorded acquisition transactions. CRITERIA: Statement on Auditing Standards (SAS) No. 99 – Fraud Auditing Standards AUDITOR ASSIGNMENTS: John Butler – Sales and Collection David Sargent – Payroll and Personnel Perry Boydstun – Acquisition and Payment Cycle METHODOLOGY: Each auditor will perform their assigned area of tests of controls and substantive test using sampling techniques as appropriate. Strengths and weaknesses’ should be denoted by using a “S” or “W” on each area applicable area of the flowchart and checklist of each assigned area. The summary status (“Ss” and “Ws”) will be listed in the bridge worksheet for SOX 404 Audit analysis. Bridge Worksheet for Sales and Collection Cycle – SOX 404 Audit Public companies typically rely heavily on proper internal controls to maintain an effective sales and collection cycle. As such, AOW will need to expand the substantive tests of transactions to include tests on controls. First of all, it is...
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...obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material aspects, in accordance with an applicable financial reporting framework * To report on the financial statements and communicate in accordance with the auditor’s findings Audit Process Overview: * Step 1: Client Acceptance and Retention * Step 2: Risk Assessment (Through understanding client business environment and operations Assess risks of material misstatement Assess Audit Risk) * Step 3: Audit Procedures Planning * Step 4: Test of controls (IF reliance on controls) * Step 5: Perform substantive tests * Step 6: Audit Completion and Reporting Financial Statement Assertions: * Assertions are representations made by management, explicit or otherwise, that are embodied in F/S, as used by auditor to consider the different types of potential misstatements that may occur * Focus on assertions as: * Different risks result in different risks of misstatements affect different assertions (transactions and account balances can be misstated in different ways with different assertions being affected, eg. Fictitious credit sales Occurrence) * Depending on...
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...Test 3 Chapter 11 1. Fundamental Concepts and Characteristics of Fraud a. Evaluation of the auditor’s fraud detection responsibilities b. Treadway Committee Report findings c. Who commits fraud and why? 2. The Auditor’s Responsibility for Detecting and Reporting upon Fraud (AU 316) a. Misstatements arising from fraudulent financial reporting – Fraud for the Entity b. Misstatements arising from misappropriation of assets – Fraud against the Entity c. The overall process: i. Identify client fraud risk areas ii. Consider client anti-fraud programs and controls iii. Respond to results of the fraud risk assessment d. Responding to misstatements identified in the audit i. Effects, if due to fraud, likely immaterial ii. Effects, if due to fraud, could be material e. Detection and reporting responsibilities within the client organization – how do we respond to fraud internally f. Responsibilities for reporting fraud to outsiders – is the same criteria for reporting fraud externally as we had to do with illegal acts. g. Audit documentation responsibilities h. Typical fraud warning signs and red flags (AU 316.85) – they are arranged by 3 elements that typically exist in some kind of combination of fraud. AU 316.85 “Examples of Fraud Risk Factors. Separately presented are examples relating to the two types of...
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...REVENUE CYCLES AUDIT OBJECTIVES, CONTROLS, AND TEST OF CONTROLS INPUT CONTROLS 1. Credit Authorization Procedures * Only customer transactions that meet the organization’s credit standards are valid and should be processed further. 2. Testing Credit Procedures * It pertains to the valuation/allocation audit objectives and the accuracy objective 3. Data Validation Controls * Input validation controls are intended to detect transcription errors in transaction data before they are processed. Validation procedures are most effective when they are performed as close to the source of transaction as possible. a. Missing Data Check – are used to examine the contents of a field for the presence of blank data or spaces (missing product numbers, missing customer accounts numbers, or incomplete mailing address) b. Numeric-alphabetic data checks – determine whether the correct form of data is in a field. An invoice total should not contain alphabetic data. c. Limit Check-determine if the value In the fields exceeds an authorized limit. (prices limit or discounts limit) 4. Batch Controls – are used to manage high volumes of transaction data through a system. The following are relevant controls: a. A unique batch number b. A batch date c. A transaction code (indicating the type of transactions, such as sales order or cash receipt). d. The numbers of records in the batch (record count) e. The total dollar value of a financial field...
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...effectiveness of the value chain and supply chain 3. Share knowledge 4. Improve the internal control structure 5. Improve decision making Key Role if the AIS 1. Collecting and storing data 2. Providing information for decisions 3. Safeguarding assets Value Chain Activities 1. Inbound Logistics------ receiving and storage 2. Operations -------------- manufacturing and repackaging 3. Outbound Logistics---- distribution shipping 4. Marketing & Sales------ advertising, selling 5. Service-------------------- repair, maintenance Characteristic of Useful Information 1. Relevant 2. Reliable 3. Timely 4. Verifiable 5. Understandable 6. Accessible 7. Complete Chapter 2/SUA Purpose/use of general ledger, subsidiary ledgers, special journals and cash prelist General Ledger= contains summary level data for every asset, liability, equity and revenue, and expense account...(accounts receivable) Subsidiary Ledger= contains detailed data for any general ledger account with many individualized subaccounts.... (Separate account for each accounts receivable) General Journal= used to record infrequent or non-routine transaction, such as loan payments Specialized Journal= records large numbers of repetitive transactions such as sales, cash receipts, and cash disbursement Sequence of events in accounting cycle 1. Collect Data 2. Journalize Transactions (capture in transaction files) 3...
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...Auditing the Revenue Cycle) Drea Tech Company has been growing rapidly and has recently engaged your firm as its auditor. It is actively traded over the counter (OTC) and management believes it has outgrown the service capabilities of its previous auditor. However, on contacting the previous auditor, you can learn that a dispute led to the firm’s dismissal. The client wanted to recognize income on contracts for items produced but not shipped. The client believed the contracts were firm and that all the principal revenue-producing activities were performed. The change in accounting principle would have increased net income by 33% during the last year. Drea is 32% owned by Anthony Dreason, who has a reputation as a turnaround artist. He bought out the previous owner of Drea Tech (formerly named Johnstone Industries) there years ago. The company’s primary products are in the materials handling business, such as automated conveyors for warehouse and production lines. Dreason has increase profits by slashing operating expenses, most notably personnel and research and development. In additional, he has outsourced a significant portion of component part production. Approximately 10% of the company’s product is now obtained from Materials Movement, Inc., a privately held company 50% owned by Dreason and his brother. A brief analysis of previous financial statement shows that sales have been increasing by approximately 20% per year since Dreason assumed control. Profitability...
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...Group 1 Apollo 7: Control evaluation and testing in the revenue cycle – evaluate the results of the control testing of the revenue cycle using the materials in the case. Look for patterns in errors that may indicate specific weaknesses over assertions. Refer to chapter materials for basic audit procedures and discussion of how to evaluate the results of your tests based on the preliminary risk assessment. Try to identify trends or specific areas of concern based on the results of control tests that were performed. Some specific trends/areas of concern: * Although Sales went down by 4% Sales Returns increased by 202.39%. * As mentioned in a previous report, the loan to the CEO’s secretary is incorrectly accounted for under Other Receivables. * Apollo sent Mall-Warts an unsolicited order in December even though Mall-Warts had informed Apollo in November that they were going into bankruptcy. * The accounting and control manual has not been kept current. * Customers who are shopping at Apollo’s location are allowed to pick their own orders. * 33% of the errors found were overbilling errors. While the amount is not material, over 70% of the errors occurred a month before the end of a quarter. Also, none of the billing errors were under billing. * Several transactions were missing the bill of lading. * Two invoices out of 51 were found with no information other than the invoice number and overcharge amounts. * 55.82% of sales were made with...
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...determine revenues and costs, analyze profitability and non-profitability customers, develop strategies and review the affects. We decided to choose Perodua as one of the local company that implements this technique. Determine Costs Determine Costs Determine Revenues Determine Revenues Select Customers Select Customers Diagram 1.1.1 Analyze profitable and non-profitable customers Analyze profitable and non-profitable customers Develop strategies Develop strategies Review the affects Review the affects Based on Diagram 1.1.1, first step shows that a company should select their customers based on customer segmentation. The basis of customer segmentation will differ across the companies and across the industries. There are two basic approaches to customer segmentation which are demographic segmentation and psychographic segmentation. Demographic segmentation based on observable characteristics such as geographic area, customer age, sex and income level. Psychographic segmentation based on customer needs and behavior such as customer values, attitudes, and interests. Perodua has selects their customers based on customer segmentations. Currently, there are two types of customer selected by Perodua which are high cost customer and low cost customer. High cost customer refers to the people which has high income level and low cost customer refers to the people which has low income level such as students. Once the customers have been identified, the annual revenue is calculated...
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