Audit of Revenue

Cycle
Nama Anggota :
Fina Ratnasari
(123150059)
Sita Novitasari
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Yogi Osvaldo (123150157)
2003 Prentice Hall Business Publishing,
Auditing
Assurance Services 9/e, Arens/Elder/Beasley
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13 - 1

Learning Objective 1
Identify the accounts and the
classes of transactions in the
sales and collection cycle.

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley

13 - 2

Accounts in the Sales

and Collection Cycle
Sales
Cash
sales
Sales on
account

Cash in Bank
Accounts Receivable
Beginning Cash receipts
balance
Sales returns
Sales on
and allowances
account
Charge-off of
Ending
uncollectible
balance
accounts

Cash Discounts
Taken
Sales Returns
and Allowances
Bad Debt
Expense

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley

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Accounts in the Sales

and Collection Cycle
Accounts Receivable
Beginning Cash receipts
balance
Sales returns
Sales on
and allowances
account
Charge-off of
Ending
uncollectible
balance
accounts

Allowance for Uncollectible Accounts

Charge-off of
Beginning
uncollectible
balance
accounts
Estimate of bad
debt expense
Ending balance
Bad Debt
Expense

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley

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Learning Objective 2
Describe the business functions
and the related documents and
records in the sales and
collection cycle.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley

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Processing Customer Orders

Customer Order:
A request for merchandise
by a customer
Sales Order:
A document describing the
goods ordered by a customer
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley

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Granting Credit

Before goods are shipped, a properly

authorized person must approve credit
to the customer for sales on account.

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley

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Shipping Goods
This is the first point in the cycle
where company assets are given up.

Shipping
document

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Billing Customers
and Recording Sales
Sales invoice
Sales transaction file
Sales journal or listing
Accounts receivable master file
Accounts receivable trial balance
Monthly statement
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Processing and Recording

Cash Receipts
Remittance advise
Prelisting of cash receipts
Cash receipts transaction file
Cash receipts journal or listing

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 10

Lockbox Systems and

Electronic Funds Transfer
Bank
Order/Payment
Information
Customer
Customer
Company
Company

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Processing and Recording

Sales Returns and Allowances
Credit memo

Sales returns and

allowances journal

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 12

Charging Off Uncollectible

Accounts Receivable
Uncollectible Account
Authorization Form
This is a document used internally to
indicate authority to write an account
receivable off as uncollectible.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 13

Providing for Bad Debts

This provision represents a residual,

resulting from managements
end-of-period adjustment of the
allowance for uncollectible accounts.

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 14

Sales Transaction
Accounts

Sales
Accounts receivable

Business
Functions

Processing customer orders,

Granting credit, Shipping goods,
Billing customers and recording sales

Sales invoice, Sales journal or listing, Sales

Documents
transaction file, Accounts receivable master
and Records
file and trial balance, Monthly statements
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 15

Cash Receipts Transaction

Accounts

Cash in bank (debits from cash receipts)

Accounts receivable

Business
Functions

Processing and recording cash receipts

Remittance advise, Prelisting of cash receipts,

Documents
Cash receipts transaction file,
and Records
Cash receipts journal or listing
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 16

Sales Returns and Allowances

Transaction
Accounts

Sales returns and allowances

Accounts receivable

Business
Functions

Processing and recording

sales returns and allowances

Documents Credit memo

and Records Sales returns and allowances journal
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 17

Charge-off of Uncollectible
Accounts Transaction
Accounts

Accounts receivable
Allowance for uncollectible accounts

Business
Functions

Charging off uncollectible

accounts receivable

Documents Uncollectible account authorization form

and Records General journal
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 18

Bad Debt Expense

Transaction
Accounts

Bad debt expense

Allowance for uncollectible accounts

Business
Functions

Providing for bad debts

Documents
General journal
and Records
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 19

Learning Objective 3
Understand how e-commerce
activities affect the
sales and collection cycle.

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 20

Effect of E-Commerce on the

Sales and Collection Cycle
The Internet
The Internet and
other developing
technologies allow
companies to develop
new business models.

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 21

Effect of E-Commerce on the

Sales and Collection Cycle
Business-to-business (B2B)
Business-to-consumer (B2C)
Managements assertions for sales and
collection activities remain the same.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 22

Effect of E-Commerce on the

Sales and Collection Cycle
Auditors should obtain an understanding
of the design and operation of key internal
controls over e-commerce revenues.
Evidence for e-commerce activities
is likely to be in electronic form.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 23

Learning Objective 4
Understand internal control
and design and perform tests
of controls and substantive
tests of transactions for sales.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 24

Methodology for Designing Controls

and Substantive Tests: Sales
Understand internal
control sales
Assess planned
control risk sales
Evaluate cost-benefit
of testing controls.

Design tests of controls

and substantive tests
of transactions for sales
to meet transactionrelated audit objectives.
Audit procedures
Sample size
Items to select
Timing

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 25

Understanding Internal
Control Sales

Study the clients flowcharts,

prepare an internal control
questionnaire, and perform
walk-through tests of sales.

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 26

Assess Planned
Control Risk Sales
Adequate separation
of duties
Proper authorization
Adequate documents
and records
Prenumbered
documents
Monthly statements
Internal verification
procedures

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 27

Internal Verification
Procedures
Evaluate cost-benefit
of testing controls.

Design tests of
controls for sales.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 28

Transaction-Related Audit
Objectives for Sales
Existence:
Recorded sales are for shipments actually made.
Completeness:
Existing sales transactions are recorded.
Accuracy:
Recorded sales are for the amount shipped.

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 29

Design Substantive Tests

of Transactions for Sales
Classification:
Sales transactions are properly classified.
Timing:
Sales are recorded on the correct dates.
Posting and summarization:
Sales transactions are properly included
in the accounts receivable master file.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 30

Direction of Tests for Sales

Customer
order

Shipping
document

Duplicate
sales invoice

Completeness Start

Sales
journal

General
ledger

Accounts
receivable
master file

Existence Start
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 31

Summary of Methodology
for Sales

Column 1: Transaction-related audit objectives

Column 2: Key internal controls
Column 3: Test of controls
Column 4: Weaknesses
Column 5: Substantive tests of transactions

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 32

Learning Objective 5
Apply the methodology for
controls over sales transactions
to controls over sales
returns and allowances.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 33

Sales Returns
and Allowances
The transaction-related audit objectives
and clients methods of controlling
misstatements are essentially the same
for processing credit memos as those
described for sales.

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 34

Sales Returns
and Allowances
There are, however, two important differences.

Materiality

Emphasis on
objectives

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 35

Learning Objective 6
Understand internal control and
design and perform tests of
controls and substantive tests
of transactions for cash receipts.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 36

Tests of Controls and Substantive

Tests
of Transactions for Cash Receipts

Determine
Determine whether
whether cash
cash received
received was
was recorded
recorded

Prepare
Prepare proof
proof of
of cash
cash receipts
receipts

Test
Test to
to discover
discover lapping
lapping of
of accounts
accounts receivable
receivable

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 37

Learning Objective 7
Apply the methodology for controls
over the sales and collection cycle
to write-offs of uncollectible
accounts receivable.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 38

Audit Tests for

Uncollectible Accounts
Existence of recorded write-offs is the most
important transaction-related audit objective.
What is a major concern in testing accounts
charged off as uncollectible?
covering up a defalcation by charging off
accounts receivable that have been collected

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 39

Additional Internal Controls

Over Account Balances
Realizable value
Rights and obligations
Presentation and disclosure

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 40

Effect of Results of Controls and

Substantive Tests of Transactions
The parts of the audit most affected by the
tests for the sales and collection cycle are:
Accounts
receivable

Bad debt
expense

Cash

Allowance for
doubtful accounts

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 41

Role of all Audit Tests in the

Sales and Collection Cycle
Sales
Sales
transactions

Accounts
Receivable

Audited by
TOC, STOT, and AP

Ending
balance

Cash receipts
transactions

Cash in
Bank

Audited by
TOC, STOT, and AP

Ending
balance

Audited by AP and TDP

TOC + STOT + AP + TDP

= Sufficient competent evidence per GAAS
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 42

End of Chapter 13

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 43