AUDIT PROGRAMME REVENUE CYCLE

TEST OF CONTROLS REVENUE TRANSACTIONS Audit Objective General Validity (to find out whether there are fictitious sales, or incidences whereby sales is recorded but goods not shipped/services not performed) Audit procedure Observe & evaluate proper segregation of duties between: (i) Findings

Since it not possible for you to about why the segregation of d

shipping function & the order entry & billing functions. U nauthorised shipments to fic through the billing control proc transactions & theft of goods. credit & billing functions. Accounts Receivable & GL functions.

(ii) (iii)

Sales can be made to custome

Unauthorised shipments can b transactions & theft of goods.

(iv) cash receipts & Accounts Receivable. Test 5 sales invoices and look for the relevant authorised sales order & shipping document (bill of lading). Review & test client procedures for accounting for numerical sequence of sales invoices.

Cash can be diverted & shorta accounting records theft. No exceptions noted. Bill of lading should show refe Your lecturer is the client. Ask in accounting for numerical seq

Lecturer's response: Sales inv serial numbers. The serial num Manager and the Finance Mana

Review & test client procedures for mailing & handling complaints about monthly customer statements.

Reduces the risk of fraudulent invoices that are misused. Your lecturer is the client. Ask

Lecturer's response: The mon generated from the Accounts R sent to the customers by the 1 complain about a balance, the with the Sales & Billing depts w

Reduces the risk of revenue b shipped/services performed, as recognise an obligation to pay

TEST OF CONTROLS REVENUE TRANSACTIONS (Contd.)

Audit Objective Audit procedure Findings Completeness Review & test client's procedures for accounting for numerical You have already performed t (to find out whether sequence of shipping documents & sales invoices. Just perform the test for shipp there are any Trace a sample of shipping documents (eg bill of lading) to Use the shipping documents & incidences where their respective sales invoices & to the sales journal. hand. Trace to sales journal fo goods are shipped/services No exceptions noted. performed but Test a sample of daily reconciliations between sales Trace sales invoices for 5 Feb revenue not recorded) invoices to daily sales report. Report. Examine the open -order file for unfilled orders older than 2 months .

No exceptions noted. Assume that there are no unfi But think of why this step is im

Timeliness (to avoid revenue transactions from being recorded in the wrong period)

Compare the dates on sales invoices with the dates of the relevant shipping documents. Compare the dates on the sales invoices to the dates they were recorded in the sales journal.

To prevent sales from being u are unfilled means that goods invoices not issued. Must have a minimum delay. No exceptions noted. Must have a minimum delay. No exceptions noted.

TEST OF CONTROLS REVENUE TRANSACTIONS (Contd.)

Audit Objective Audit procedure Findings Authorisation Review the client's procedures for granting credit to Your lecturer is the client. Ask (to avoid incidences customers. where goods are Lecturer's response: When sal shipped/services passed to the Finance Manager performed for a Manager will review the custom customer who is a bad company. If it is positive, then credit risk; to avoid Examine sales orders for evidence of credit approval. No exceptions noted. shipments/services Ensure that all shipping documents are accompanied by You have already performed t performed at authorised sales orders. unauthorised prices or on unauthorised terms) Authorisation Compare prices/terms on sales invoices to authorised price No exceptions noted. list & terms of trade. Valuation Valuation Examine the sales invoice for evidence that a client personnel No exceptions noted. (to ensure that sales verified mathematical accuracy (look for the initials of the transaction is recorded staff who did the verification). at the correct amount) Recompute the information on a sample of 5 sales No exceptions noted. invoices. Classification Review the sales journal & general ledger for proper No exceptions noted. (to ensure that the classification of accounts. sales transaction is Examine sales invoices for proper classification. No exceptions noted. properly classified) Posting & Examine the reconciliation of sales invoices to daily sales You have already performed t summarisation report. (to ensure correct Examine the reconciliation of entries from sales journal to No exceptions noted. posting to sales Accounts Receivable subsidiary ledger. journal or customer's Review the reconciliation of Accounts Receivable subsidiary Credit Memo C01231 re: sales accounts in the ledger to general ledger control account. not been recorded in the gener Accounts Receivable Review & test client procedures for mailing & handling You have already performed t subsidiary ledger, and complaints related to monthly customer statements. from sales journal to the general ledger)

TEST OF CONTROLS CASH RECEIPT TRANSACTIONS Audit objective Validity (to avoid incidences whereby cash receipts are recorded, but not received or deposited in the bank account ) Completeness Review monthly bank reconciliations to ensure that they have been independently reviewed.

Audit procedure Findings Observe & evaluate the proper segregation of duties between Since it not possible for you to the cash receipts & Accounts Receivable s function. about why the segregation of d

Otherwise, staff could receive debtor pays up, he record s th applies that receipt against Cu Cr A/cs Receivable). No compl receipt is taken up, and the bo 'lapping'). The staff will shift t Debtor. For our exercise, use only 1 ba reconciliation statement for Sta ( Feb 2006 ) only.

No exceptions noted. Completeness Ensure that all cheques received are payable in the name of Use cheques received for Marc (to ensure that cash the company (crossed Account Payee Only). receipts are not stolen No exceptions noted. In real li or lost before being already banked-in. recorded) Examine daily pre-listing of cash receipts. Use the pre-listing for 15 Marc

No exceptions noted. Test the reconciliation of daily cash receipts with posting to For daily cash receipts, you m Accounts Receivable subsidiary ledger. March 2006. Trace to available Accounts Receivable Subsidiary

Timeliness (to ensure that cash receipts are not recorded in the wrong period) Authorisation Test a sample of cash receipts transactions for proper cash (to ensure that cash discounts. discounts are properly given)

No exceptions noted. Inquire of client personnel about the handling of monthly You have already performed t customer statements & the examination of resolution of complaints. Examine cash receipts to see whether they are deposited into Use the daily pre-listing of cas the bank daily. For banking in, refer to the rele

Noted that cash receipts are d receipt (18.3.2006) not very No discounts were given.

TEST OF CONTROLS CASH RECEIPT TRANSACTIONS (Contd.)

Audit objective Audit procedure Findings Valuation Review & test that the daily remittance report is reconciled to Use Daily Remittance Report f (to ensure that cash the control listing of remittance advices. receipts are recorded No exceptions noted. at the proper amount) Review monthly bank reconciliations to ensure that they You have already performed t have been independently reviewed. Classification Trace cash receipts from the cash receipts listing to the cash Use the daily pre-listing of cas (to ensure that cash receipts journal for proper classification. trace to cash receipts journal f receipts are recorded in the correct account) No exceptions noted. Review the cash receipts journal for unusual items. No exceptions noted. Posting & uthorizedd Review & test the daily reconciliation of daily remittance Use Daily Remittance Report f (to ensure that cash report with postings to the cash receipts journal & Accounts receipts journal for March 2006 receipts are posted to Receivable subsidiary ledger. subsidiary ledger that you have the right customer account, and properly No exceptions noted. (Traced posted to the right Spielberg on AR sub ledger.) general ledger Review & test client procedures for mailing & handling You have already performed t accounts) complaints related to monthly customer statements. Review the posting from the cash receipts journal to the No exceptions noted. general ledger. Examine the reconciliation of Accounts Receivable You have already performed t subsidiary ledger to the general ledger.

TEST OF CONTROLS SALES RETURNS & ALLOWANCES TRANSACTIONS Audit objective Validity

Audit procedure Findings En sure that the credit memorandum (for returned goods or A sk for the credit memoranda discounts allowed or bad debts written off ) is approved by a person other than the personnel who initiated it. No exceptions noted for app Spielberg's return. Ensure that a credit memorandum for returned goods is supported by a receiving document indicating that goods However, no receiving docum have been returned. returned goods by Angelina Jo is not uthorized .

Goods Returns Clerk colludes Angelina Jolie had paid RM6,5 Invoice No. 238902. The Cas did not record it in the Prelistin cash receipt was not taken up

At the same time, the Ret addressed to Ms. Angelina Jol her.

Auditors: Will find that the returned goods, because the g

[ Credit memoranda can be u of goods or conceal a misappr ships goods/steals cash, he ap the relevant Accounts Receiva account balance is therefore complaints. ]

SUBSTANTIVE PROCEDURES TRANSACTIONS RELATED TO ACCOUNTS RECEIVABLE Audit objective Validity Completeness Cut-off Audit procedure For a sample of sales transactions recorded in the sales journal, trace sales invoices back to sales orders & shipping documents. Trace a sample of shipping documents to the details of the sales invoices & to the sales journal & customers' Accounts Receivable subsidiary ledger. Compare the dates on a sample of sales invoices with the shipment dates and with the dates they are recorded in the sales journal. Compare prices & terms on a sample of sales invoices with the uthorized price list & terms of trade. For a sample of sales invoices, test posting to the sales journal & Accounts Receivable subsidiary ledger for the correct amounts.

Findings You have already performed t

You have already performed t

Use the sales invoices, bills of already have.

Valuation Accuracy

No exceptions noted. You have already performed t No exceptions noted.

SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS Audit objective Audit procedure Revenue To find out any Compare the gross unrecorded/ profit percentage by understated/fictitious product line with revenue previous years & industry data. Compare sales by month (by product line) over the year. Findings No need to compare for industry data. See Appendix A. GP margin has remained reasonably consistent. See Appendix B. Tub ice-cream sales increased in February, when Bestmart Hypermarket had a Special Sale and purchased extra stocks. in May, King Bee made a big purchase of RM550K in the setting up of its retail shop. Sales of RM66K also made to Tong Hing Supermarkets because of its Dairy Products Campaign during that month. General increase in December because of sales to supermarkets/stores in anticipation of the Christmas/New Year sale. Cone ice-cream sales increased July onwards because of the installation of a new rollercoaster ride The Terminator.

SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS (Contd.) Audit objective To find out any changes in price policies, product pricing problems Audit procedure Compare reported revenue to budgeted revenue. Compare individual customer balances over RM100,000 with previous years. Findings Assume none. See Accounts Receivable Trial Balance. No major variance as compared to 2005 , except for the balance due from King Bee Retail Shop which has increased by about RM700K. The reason for this is that King Bee Retail Shop, which is a business owned by the director Wong King Bee, started trading extensively in 2006 , and hence receivables have increased in 2006 .

Accounts Receivable , provision for doubtful debts, bad debts expense To find out Compare receivables any turnover & days under/over outstanding in Accounts statement of Receivable to previous provision for year's and/or industry doubtful debts data. & bad debt expense Compare aging categories on aged trial balance of Accounts Receivable to previous years.

No need to compare for industry data. See Appendix E. Increase of number of days' receivables outstanding from 116 to 153 days due mainly to the increase in balance due from King Bee Retail Shop. A large part of the balance outstanding has not been repaid as at 31.12.200 6 . See Accounts Receivable Trial Balance. In 2005 , debtors repaid the outstanding balances faster. Note that there no outstanding balances which were more than 6 months as it was the policy of the company to charge interest of 2% on outstanding balances after 6 months. 2006 : King Bee Retail Shop started trading extensively only in 2006 . Because it is a director-owned business, there is a special trade relationship whereby the company allows it a looser credit period. No need to compare for industry data. See Appendix D. Bad debt expense have remained consistent from that of previous year. No need to compare for industry data. Also, in this case, assume that credit sales = total gross sales. See Appendix F. Allowance for uncollectible accounts & charge-off of uncollectible accounts have remained reasonably consistent from that of previous year.

Compare bad debt expense as a % of revenue to previous year's and/or industry data. Compare provision for doubtful debts as a % of Accounts Receivable or credit sales to previous year's and/or industry data. Compare bad debt expense as a % of Accounts Receivable or credit sales to previous year's and/or industry data. Examine large customer accounts individually & compare to previous year.

To check for any long outstanding balances. None noted.

SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS (Contd.) Audit objective Sales returns, commissions Under/over statement of sales returns Audit procedure allowances, sales Compare sales returns & See Appendix C. allowances as a percentage of gross sales Sales returns & allowances have remained consistent from with previous years (by that of previous year. product line). Note that there are no sales returns/allowances for cone ice-creams ice-creams sold in the park are never returned, and discounts are never asked for. Compare sales discounts See Appendix G. as a % of revenue to previous year's and/or Sales discounts have remained consistent from that of industry data. previous year. Estimate sales No need to do this. commission expense by multiplying net revenue by average commission rate & compare recorded sales commission expense. Findings

Under/over statement of sales discounts Under/over statement of sales commission expense & related accrual

SUBSTANTIVE PROCEDURES TEST OF BALANCES FOR ACCOUNTS RECEIVABLE & PROVISION FOR DOUBTFUL DEBTS & BAD DEBT EXPENSE Audit objective Validity Audit procedure Review Accounts Receivable Trial Balance for large and unusual receivables. Findings Unusual receivable the large overdue balance due from King Bee Retail Shop. King Bee Retail Shop is owned by one of the directors of Ice Cream Paradise. Hence it is a related party balance. Obtain the standard confirmation form as used by auditors. Decide on which amounts you will need to send confirmation requests to. Review the confirmation request to see how you can fill it. Refer to Accounts Receivable Subsidiary Ledger . You will not need to do verification of items for this exercise. Lecturer will explain. All debtors show receipts after the year end (means they are active debtors) except for King Bee Retail Shop & Kedai Runcit Ahmad. The General Ledger is not provided to you in this exercise. Assume that the totals agree.

Confirm Accounts Receivable, using positive confirmations. Confirm all amounts over RM100,000. Perform alternative procedures for all confirmations not returned on the 1 / 2 request. (a) Check for subsequent cash receipts after year end. (b) Verify items making up the receivables to sales invoices/shipping documents/official receipts. Completeness Obtain the aged Accounts Receivable Trial Balance. Agree the total to the general ledger.
st nd

SUBSTANTIVE PROCEDURES TEST OF BALANCES FOR ACCOUNTS RECEIVABLE & PROVISION FOR DOUBTFUL DEBTS & BAD DEBT EXPENSE Audit objective Cut-off Audit procedure Select the last 4 sales transactions from the current year's sales journal and the first 4 from the subsequent years. Trace each sales transaction to their shipping/delivery documents, checking for the date of actual delivery & the correct recording. Review the sales journal for large sales returns & allowances before and after the balance sheet date. Determine whether they are recorded in the correct period. Review the minutes of the board of directors meetings and inquire of management to determine whether any receivables are pledged/factored. Findings All transactions can be traced to delivery documents and are proper.

Sales returns/allowances have been recorded in the correct period.

Ownership

Accuracy

Review bank confirmations for any liens on receivables. Obtain the aged Accounts Receivable trial balance. Agree the total to the general ledger. Trace selected items from the aged Accounts Receivable trial balance to the Accounts Receivable subsidiary ledgers & sales invoices for proper amount & aging. Obtain an analysis of the provision for doubtful debts & bad debt expense. Trace the totals to the general ledger. Trace the individual items to Accounts Receivable subsidiary ledgers.

Minutes show that the BOD has approved to pledge its trade receivables in order to secure a term loan from BCB. However, will need to follow up on subsequent minutes to see whether this was actually done. Also to look at term loan agreement, letter of pledge, etc if/when term loan is actually obtained. Assume that bank confirmation reply from BCB confirms the above. You have already performed this above. For this exercise, no sales invoices are provided. Therefore, assume that items on the Accounts Receivables Subsidiary Ledger can be properly traced to sales invoices. All accounts should be correctly traced. Assume that all items & totals trace correctly.

SUBSTANTIVE PROCEDURES TEST OF BALANCES FOR ACCOUNTS RECEIVABLE & PROVISION FOR DOUBTFUL DEBTS & BAD DEBT EXPENSE (Contd.) Audit objective Valuation Audit procedure Findings

Examine the results of the confirmation In this examination, we are examining of Accounts Receivables. whether the amounts confirmed agree with the amounts in the Accounts Receivable Subsidiary Ledger. If the amounts don't agree, then we would need to investigate the difference. Discuss with the credit manager the likelihood of collecting older accounts. Examine subsequent cash receipts & the credit file on all larger accounts over 90 days & evaluate whether the receivables are collectible. For this exercise, assume that all agree. All receivables appear to be collectible as there were subsequent receipts after the year end, except for that of King Bee Retail Shop. However, as King Bee is a related party balance with special credit terms, the directors of the company were of the opinion that the amount remains recoverable. [However, to debate this.] Use own judgement.

Classification Disclosure

Evaluate whether the allowance is adequate after performing other audit procedures for collectibility of receivables. Review the receivables listed on the aged None noted. trial balance for material credits, longterm receivables & non-trade receivables. Inquire whether there are any related King Bee Retail Shop is owned by one of party receivables. Ensure that they are the directors of Ice Cream Paradise. Hence properly disclosed. it is a related party balance. Review receivables listing for any You will need to ask the client about this. accounts that have been pledged, assigned or discounted. None pledged other than that mentioned in the BOD minutes (pledged to BCB).