ACCY 401 Handout #12 Griffin

________: (initial risk assessment----> design) -Used to understand and document internal controls related to revenue -Used to make preliminary assessment of CR for each transaction-related audit objective in the revenue cycle -Main evidence: --Walkthroughs --Inquiry (ask client questions) --Read policies and manuals --Inspect documents and records --Observe activities and operations (how they do things ---> process)

Risk Assessment Procedures (RAP)

_________: -Tests to determine whether key controls are operating as designed -Main evidence: --Walkthroughs --Inquiry --Inspect documents, records, reports --Observe control activities --Re-perform control procedures Note that exceptions discovered during TOCs do not necessarily indicate F/S misstatement!

Tests of Controls (TOC)

__________: -TDB are used to determine whether the 8 balance-related objectives are met: -Existence, Completeness -Rights & Obligations -Accuracy, Cutoff, Detail Tie-in, Realizable Value, Classification Example: To test accuracy of cash balances, send confirmations to all banks that the client does business with.

Tests of Details of Balances (TDB)

Accuracy - A/R are accurate - Primary test: ______ -Alternative procedures for non responses (errors against them more than for them): examine subsequent cash receipts and supporting documents for evidence of shipment Under: -Liability -Expenses Over: -Assets -Revenue

confirmation

Key Authorizations (3) 1. _____- must be authorized before sale 2. _____- must be authorized 3. _____- terms, freight, discounts

credit shipment prices

Occurrence and Completeness: want all sales invoices and all bill of lading to perfectly match -on books= actual sales sales invoices exist, but not bill of lading: bill of lading exist, but not sales invoice:

overstatement of revenue (more of a problem) completeness problem

Auditing Revenue Revenue recognition review -Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivery or producing goods, rendering services, or other activities that constitute the entity's major or central operation (CON 6) Revenue is recognized when ______ and _______. (CON 5) Realized = Product/ service exchanged for cash, promise to pay, assets convert to cash Earned = Entity has sub. completed the earnings process (generally upon delivery) Our focus is on manufacturers and wholesalers - when is their revenue recognized? revenue recognition is an increase fraud (risk area)

realized and earned

Confirmation - 3 types per SAS 67 (AU330) 1. Positive with a request for information to be supplied by the recipient (positive confirm = the recipient is requested to respond/return the confirm in all circumstances). 2. Positive with the information to be confirmed included on the form. 3. Negative confirm (negative = the recipient is requested to respond/return the confirm only when the information is incorrect).

1. positive blank 2. positive complete

_________: -Comparisons of recorded information and auditor's expectations. -Recall that one purpose of APs is to serve as substantive tests.

Analytical Procedures (AP)

Fraud risk factors for revenue: -________ - arrangements used to alter terms and conditions of recorded sales in order to entice customers to accept delivery of goods -_________ - inducements to distributors to buy substantially more inventory than they can promptly resell -__________ - inducements for customers to issue PO's in advance of needing goods, seller agrees to ship goods at later date (sellor sold goods but still has it) -Related-party transactions - present "substance over form" issues

Side agreements Channel stuffing Bill and hold

Auditing the Revenue Cycle (cont'd) Types of Audit Procedures _________: -Substantive tests are designed to test for misstatements directly affecting F/S balances TDT determine whether 6 transaction-related audit objectives are met: Occurrence Completeness Accuracy Posting and summarization Timing Classification Primary procedures for TDT: Re-performance Documentation

Tests of Details of Transactions (TDT)

Major functions of cash receipts process: -_______: processing of receipt of cash from customers -_______: recording all sales invoices, collections and credit memoranda in individual customer accounts -________: proper accumulation, classification, and summarization of revenues, collections, and receivables in the F/S accounts DR: Cash CR: AR

cash receipts accounts receivable general ledger

Existence -recorded A/R exist (client owes $, AR actually is turned into cash @ end) -Primary test: ______ (strong: comes from outside source but might not get response) -Alternative procedures for non responses: examine subsequent cash receipts (see if they paid) and supporting documents for evidence of shipment (if didn't pay check the shipping)

confirmation

Confirmations of A/R SAS 67 (AU 330) generally requires confirmations unless one of the following is true: 1. A/R is _____ 2. Confirmation would be ineffective because of ______ rate or unreliable responses 3. Combined _______ is low and substantive evidence can be collected that is sufficient * have to confirm AR, but above are exceptions. NEVER actually used

immaterial low response IR and CR

Major functions of revenue process: -_______: acceptance of customer orders and entry into system in accordance with management criteria -________: appropriate approval of customer orders for credit worthiness -________: shipping of goods that has been authorized -________ issuance of sales invoice to customers for goods shipped/services provided; processing of billing adjustments for allowances, discounts, and returns (recording sale: put on customer books and post to ledger) DR: AR CR: Sales

order entry credit authorization shipping billing

Key Segregation of Duties: -Credit function separate from ______ (authorization from OP) --Risk sales to customers who are not credit worthy - increased bad debts -Shipping function separate from _______ (custody from recording) --Risk unauthorized shipments and circumvention of usual billing procedures - unrecorded sales and theft of goods -Cash received separate from _______ (custody from recording) --Risk cash being diverted and shortage of cash to be covered up in accounting records (lapping) - theft of cash

sales billing AR

Analysis of confirmation responses Must determine whether errors exist when customers respond as follows: Common Reply's: -Payment has been made (when?) -Goods have not been received (on books but customer "doesnt have") -Goods have been returned (when?) -Clerical errors (differences) -Disputed amounts (difference from existence----> it exists, but difference in price)

when? before YE= bad!