Chapter 9 auditing the revenue cycle l.jpg
This presentation is the property of its rightful owner.
Sponsored Links
1 / 29

Chapter 9: Auditing the Revenue Cycle PowerPoint PPT Presentation


  • 415 Views
  • Updated On :
  • Presentation posted in: General

Chapter 9: Auditing the Revenue Cycle. IT Auditing & Assurance, 2e, Hall & Singleton. MANUAL PROCEDURES. Follow Figure 9-1 Obtaining & recording customers’ orders Document = SALES ORDER [Figure 9-2] One copy in “Open Order File” Approving credit

Related searches for Chapter 9: Auditing the Revenue Cycle

Download Presentation

Chapter 9: Auditing the Revenue Cycle

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Chapter 9 auditing the revenue cycle l.jpg

Chapter 9:Auditing the Revenue Cycle

IT Auditing & Assurance, 2e, Hall & Singleton

IT Auditing & Assurance, 2e, Hall & Singleton


Manual procedures l.jpg

MANUAL PROCEDURES

  • Follow Figure 9-1

  • Obtaining & recording customers’ orders

    • Document = SALES ORDER [Figure 9-2]

    • One copy in “Open Order File”

  • Approving credit

    • One copy of sales order went to credit dept.

    • Returned authorized copy triggers release of sales order into system

IT Auditing & Assurance, 2e, Hall & Singleton


Manual procedures3 l.jpg

MANUAL PROCEDURES

  • Processing shipping orders

    • 4 copies of Sales Order to warehouse; packing slip, shipping notice, stock release, file copy

    • Locate and “pick” goods using Stock Release; package them with packing slip

    • Reconcile documents and goods, sign Shipping Notice, prepare Bill of Lading – multiple copies [Figure 9-3]

    • Transfer custody of goods (packing slip inside) and 2 copies of Bill of Lading to carrier

    • Record shipment in shipping log

    • Send shipping notice to Billing Dept.

    • File: Stock Release, 1 BOL, File Copy

IT Auditing & Assurance, 2e, Hall & Singleton


Legacy system procedures l.jpg

LEGACY SYSTEM PROCEDURES

  • Keypunch batch of shipping notices

  • Edit run program, correct any errors

    • Field checks

    • Limit tests

    • Range tests

    • Price times quantity extensions

  • Sort run on batches by AR account number

    • Legacy systems store records in sequential manner, usually tape

    • Next process is to “post” individual shipping notices to appropriate individual AR accounts

  • AR update & billing run[Figure 9-4]

    Updates AR file becomes new AR file

    • Billing would be printing invoices to be mailed

    • Sales journal file or printout

    • Journal voucher for AR [DR] and sales [CR]

IT Auditing & Assurance, 2e, Hall & Singleton


Legacy system procedures5 l.jpg

LEGACY SYSTEM PROCEDURES

  • Re-sort by inventory item {why?}

    • Same reason; but this process is to update Inventory Items

  • Inventory update run [Figure 9-5]

    • Reduce quantity on hand for items shipped, generate a new Inventory file

    • Compare “On Hand” quantity with “Reorder Point” to identify items needing replenishment; file or printout

    • Journal voucher for Cost of Goods Sold [DR] and Inventory [CR]

  • Sort journal entries by GL #

  • Run general ledger update

  • Management reports

IT Auditing & Assurance, 2e, Hall & Singleton


Batch cash receipts systems with direct access files l.jpg

BATCH CASH RECEIPTS SYSTEMS WITH DIRECT ACCESS FILES

  • See Figure 9-6

  • Discrete events that naturally fit the batch approach

  • Update Procedures

    • Mail Room

      • Receives checks and Remittance Advices.

      • Separates checks from Remittance Advices

      • Prepares a Remittance List – multiple copies

      • Copy of Remittance List and checks go to Cash Receipts Dept.

      • Remittance Advices and copy of Remittance List go to AR Dept.

      • Last copy of Remittance List to Controller’s Office

IT Auditing & Assurance, 2e, Hall & Singleton


Batch cash receipts systems with direct access files7 l.jpg

BATCH CASH RECEIPTS SYSTEMS WITH DIRECT ACCESS FILES

  • Cash receipts dept.

    • Reconciles checks and remittance list

    • Prepares deposit slip – multiple copies

    • Using terminal/IS, creates a journal voucher of cash received; Cash [DR] and AR [CR]

    • End of day, deposit cash and Deposit slips to the bank

    • File copy of deposit slip

IT Auditing & Assurance, 2e, Hall & Singleton


Batch cash receipts systems with direct access files8 l.jpg

BATCH CASH RECEIPTS SYSTEMS WITH DIRECT ACCESS FILES

  • AR Dept.

    • Reconciles remittance advices and remittance list

    • Prepares batch for transactions based on remittance advice data to update AR subsidiary ledger

    • Files remittance advices and remittance list

IT Auditing & Assurance, 2e, Hall & Singleton


Batch cash receipts systems with direct access files9 l.jpg

BATCH CASH RECEIPTS SYSTEMS WITH DIRECT ACCESS FILES

  • DP Dept.

    • Accesses the two files created in cash receipts (journal voucher) and AR (batch transaction file of CR)

    • Reconciles the files

    • Updates AR-SUB accounts

    • Updates GL (AR, Cash)

    • Creates a cash receipts journal

    • System produces transaction listing that is sent to AR dept. where AR clerk will reconcile against the remittance list of file there

    • More management reports

IT Auditing & Assurance, 2e, Hall & Singleton


Real time sales order entry and cash receipts l.jpg

REAL-TIME SALES ORDER ENTRY AND CASH RECEIPTS

  • See Figure 9-7

  • Sales procedures

    • Transactions are processed as they occur, separately

    • Credit check is performed online by the system

    • If approved, system checks availability of inventory

    • If available, system:

      • Transmits electronic stock release to warehouse dept

      • Transmits electronic packing slip to shipping dept

      • Updates inventory file records for depletion

      • Records sale in open sales order computer file

IT Auditing & Assurance, 2e, Hall & Singleton


Real time sales order entry and cash receipts11 l.jpg

REAL-TIME SALES ORDER ENTRY AND CASH RECEIPTS

  • Warehouse procedures

    • Produces hard copy of stock release

    • Clerk picks goods, sends them with a copy of stock release to shipping dept.

  • Shipping procedures

    • Reconciles goods, stock release, packing slip from system.

    • Online, IS prepares Bill of Lading for shipment, and shipping notice for DP Dept.

    • Select carrier and prepare goods for shipment, along with packing slip and Bill of Lading

    • Stock release form is filed

IT Auditing & Assurance, 2e, Hall & Singleton


Real time sales order entry and cash receipts12 l.jpg

REAL-TIME SALES ORDER ENTRY AND CASH RECEIPTS

  • Billing procedures

    • Record sales invoice and shipment in IS

    • Print invoice to be sent to customer

    • Update shipping log and sale invoice files

    • Delete shipment from open sales order file

  • Cash receipts procedures

    • Keypunch cash receipts using the remittance advice into IS,matching it with the specific record in the sales invoice file

    • Keypunch any credit memos using similar process

    • Generate a remittance file of posted transactions

IT Auditing & Assurance, 2e, Hall & Singleton


Features of real time processing l.jpg

FEATURES OF REAL-TIME PROCESSING

  • Events Database

    • Traditional accounting does not have to exist in per se (in traditional form)

    • General Ledger can be derived at any time from a compilation from the events database

  • Advantages

    • Greatly shortens the cash cycle of the firm

    • Can give a firm a competitive advantage (e.g., managing inventory better)

    • Real-time editing permits the identification of many kinds of errors as they occur, greatly reducing the efficiency and effectiveness of business processes

    • Reduces the amount of paper documents

    • Electronic audit trails are possible in real-time computer-based systems

IT Auditing & Assurance, 2e, Hall & Singleton


Management assertions and revenue cycle audit objectives l.jpg

MANAGEMENT ASSERTIONS AND REVENUE CYCLE AUDIT OBJECTIVES

  • Existence / Occurrence

    • VERIFY AR balance represents amounts actually owed as of Balance Sheet date

    • Establish sales represents goods shipped and/or services rendered during period of financials

  • Completeness

    • Determine all amounts owed organization are included in AR

    • VERIFYshipped goods, services rendered, and/or returns and allowances for period are included in financials

  • Accuracy

    • VERIFY revenue transactions are accurately computed, based on correct prices and quantities

    • EnsureAR subsidiary ledger, sales invoice file, remittance file are mathematically correct .. And agree with GL accounts

  • Rights & Obligations

    • Determineorganization has legal right to AR

    • VERIFY accounts sold or factored have been removed from AR

  • Valuation or Allocation

    • Determine AR balance stated in net realizable value

    • Establishallocation for uncollectible accounts is appropriate

  • Presentation and Disclosure

    • VERIFYAR and revenues for period are properly described and classified

IT Auditing & Assurance, 2e, Hall & Singleton


Input controls l.jpg

INPUT CONTROLS

  • Purpose

    • Ensure creditworthiness of customers

    • Control techniques vary considerably between batch systems and real-time systems

    • Credit authorization procedures

      • Credit worthiness of customer

      • Batch and manual systems use credit dept.

      • Real-time systems use programmed decision rules

    • Testing credit procedures

      • Verifyeffective procedures exist

      • Verifyinformation is adequately communicated

      • Verifyeffectiveness of programmed decision rules (test data, ITF)

      • Verifythat authority for making credit decisions is limited to authorized credit personnel/procedures

      • PerformSubstantive Tests of Detail

      • Reviewcredit policy periodically and revise as necessary

IT Auditing & Assurance, 2e, Hall & Singleton


Input controls16 l.jpg

INPUT CONTROLS

  • Data Validation Controls

    • To detect transcription errors in data as it is processed

      • Batch: after shipment of goods

        • Error logs

        • Error correction computer processes

        • Transaction resubmission procedures

      • Real-Time: Errors handled as they occur

    • Missing data checks – presence of blank fields

    • Numeric-Alphabetic data checks – correct form of data

    • Limit checks – value does not exceed max for the field

    • Range checks – data is within upper and lower limits

    • Validity checks – compare actual values against known acceptable values

    • Check digit – identify keystroke errors by testing internal validity

  • Testing Data Validation Controls

    • Verify controls exist and are functioning effectively

    • Validation of program logic can be difficult

      • If Controls over system development and maintenance are NOT weak, testing data editing/programming logic more efficient than substantive tests of details (test data, ITF)

      • Some assurance can be gained through the testing of error lists and error logs (detected errors only)

IT Auditing & Assurance, 2e, Hall & Singleton


Input controls17 l.jpg

INPUT CONTROLS

  • Batch controls

    • Manage high volumes of similar transactions

    • Purpose: Reconcile output produced by system with the original input

    • Controls continue through all computer (data) processes

    • Batch transmittal sheet:

      • Unique batch number

      • Batch date

      • Transaction code

      • Record count

      • Batch control total (amount)

      • Hast totals (e.g., account numbers)

  • Testing data validation controls

    • Failures of batch controls indicates data errors

    • Involves reviewing transmittal records of batches processed and reconcile them to the batch control log (batch transmittal sheet)

    • Examine out-of-balance conditions and other errors to determine cause of error

    • Review and reconcile transaction listings, error logs, etc.

IT Auditing & Assurance, 2e, Hall & Singleton


Process controls l.jpg

PROCESS CONTROLS

  • Computerized procedures for file updating

  • Restricting access to data

  • Techniques:

    • File update controls -- Run-to-run batch control data to monitor data processing steps

    • Transaction code controls – to process different transactions using different programming logic (e.g., transaction types)

    • Sequence check controls – sequential files, proper sorting of transaction files required

    • Testing file update controls – results in errors

      • Testing data that contains errors (incorrect transaction codes, out of sequence)

      • Can be performed in ITF or test data

      • CAATTs requires careful planning

      • Single audit procedure can be devised that performs all tests in one operation.

IT Auditing & Assurance, 2e, Hall & Singleton


Access controls l.jpg

ACCESS CONTROLS

  • Prevent and detect unauthorized and illegal access to firm’s systems and/or assets

    • Warehouse security

    • Depositing cash daily

    • Use safe deposit box, night box, lock cash drawers and safes

    • Accounting records

      • Removal of an account from books

      • Unauthorized shipments of goods using blank sales orders

      • Removal of cash, covered by adjustments to cash account

      • Theft of products/inventory, covered by adjustments to inventory or cash accounts

    • Testing access controls – heart of accounting information integrity

      • Absence thereof allows manipulation of invoices (i.e., fraud)

      • Access controls are system-wide and application-specific

      • Access controls are dependent on effective controls in O/S, networks, and databases

IT Auditing & Assurance, 2e, Hall & Singleton


Physical controls l.jpg

PHYSICAL CONTROLS

  • Segregation of duties

    • Rule 1: Transaction authorization separate from transaction processing

    • Rule 2: Asset custody separate from record-keeping tasks

    • Rule 3: Organization structured such that fraud requires collusion between two or more people

  • Supervision

    • Necessary for employees who perform incompatible functions

    • Compensates for inherent exposure from incompatible functions

    • Can be supplement when duties are properly segregated

    • Prevention vs. detection of fraud and crime is objective: supervision can be effective preventive control

IT Auditing & Assurance, 2e, Hall & Singleton


Physical controls21 l.jpg

PHYSICAL CONTROLS

  • Independent verification

    • Review the work of others at critical points in business processes

    • Purpose: Identify errors or possible fraud

    • Examples:

      • Shipping dept. verifies goods sent from warehouse dept. are correct in type and quantity

      • Billing dept. reconciles shipping notice with sales notice to ensure customers billed correctly

  • Testing physical controls

    • Review organizational structure for incompatible tasks

    • Tasks normally segregated in manual systems get consolidated in DP systems.

    • Duties of design, maintenance, and operations for computers need to be separated

    • Programmers should not be responsible for subsequent program changes.

IT Auditing & Assurance, 2e, Hall & Singleton


Output controls l.jpg

OUTPUT CONTROLS

  • PURPOSE:Information is not lost, misdirected, or corrupted; that the system output processes function properly

  • Controls are designed to identify potential problems

    • Reconciling GL to subsidiary ledgers

    • Maintenance of the audit trail – that is the primary way to trace the source of detected errors

      • Details of transactions processed at intermediate points

      • AR change report

      • Transaction logs: permanent record of valid transactions

      • Transaction listings – successfully posted transactions

      • Log of automatic transactions

      • Unique transaction identifiers

      • Error listings

  • Testing output controls

    • Reviewing summary reports for accuracy, completeness,timeliness, and relevance for decisions

    • Trace sample transactions through audit trails; including transaction listings, error logs, and logs of resubmitted records

    • ACL is very helpful in this process

IT Auditing & Assurance, 2e, Hall & Singleton


Substantive tests of revenue cycle accounts l.jpg

SUBSTANTIVE TESTS OF REVENUE CYCLE ACCOUNTS

  • PURPOSE:Determine the nature, timing, and extent of substantive tests using auditor’s assessment of inherent risk, unmitigated control risk, materiality considerations, and efficiency of the audit.

  • Concern: Overstatement or understatement of revenues?

    • Focus on large and unusual transactions, especially near period-end

    • Recognizing revenues from sales that did not occur

    • Recognizing revenues BEFORE they are realized

    • Failing to recognize cutoff points

    • Underestimating allowance for doubtful accounts

    • Shipping unsolicited products to customers, subsequently returned

    • Billings customers for products held by seller

    • Tests of controls and substantive tests

      • Credit limit logic may be effective but cut-off of AR may be error

      • Substantive testing of AR may give assurance about accuracy of total AR but does not offer assurance about collectibility

IT Auditing & Assurance, 2e, Hall & Singleton


Substantive tests of revenue cycle accounts24 l.jpg

SUBSTANTIVE TESTS OF REVENUE CYCLE ACCOUNTS

  • Understanding data

    • VERIFY data used in CAATTs (e.g., ACL) is accurate

    • VERIFY adequate setup of files from originals (e.g., ACL and Profilecommand)

    • Relationships and data from [see Figure 9-10]:

      • Customer file

      • Sales Invoice file

      • Line item file

      • Inventory file

      • Shipping log file

    • File preparation procedures

IT Auditing & Assurance, 2e, Hall & Singleton


Substantive tests of revenue cycle accounts25 l.jpg

SUBSTANTIVE TESTS OF REVENUE CYCLE ACCOUNTS

  • Accuracy/completeness assertion

    • Analytical review of account balances

      • Overall perspective for trends in sales, cash receipts, sales returns, and AR

      • Provides first-level assurance that amounts are reasonably stated and reasonably complete

      • If so, may reduce the extent of substantive testing

    • Review sales invoices for unusual trends and exceptions

      • Scanning data files using CAAT (e.g., ACL and stratify and possibly filters - see Figure 9-11)

        • Reveals all errors or raises questions?

IT Auditing & Assurance, 2e, Hall & Singleton


Substantive tests of revenue cycle accounts26 l.jpg

SUBSTANTIVE TESTS OF REVENUE CYCLE ACCOUNTS

  • Accuracy/completeness assertion

    • Review sales invoice and shipping log files

      • Missing and duplicate transactions [see Table 9-2]

      • Questions/survey:

        • Are procedures in place to document and approve voided invoices?

        • How are gaps in sales invoice numbers communicated to management?

        • What physical controls exist over access to sales invoice source documents?

        • If applicable, are batch totals used to control batch transactions during each processing step?

        • Are transaction listings reconciled and reviewed by management?

    • Review line item and inventory files for pricing accuracy

      • ACL allows auditor to compare prices on invoices with inventory – using JOIN [see example on page 413]

      • Testing unmatched records (complement)

IT Auditing & Assurance, 2e, Hall & Singleton


Substantive tests of revenue cycle accounts27 l.jpg

SUBSTANTIVE TESTS OF REVENUE CYCLE ACCOUNTS

  • Existence assertion

    • Confirmation of AR – SAS #67

      • Not required if:

        • AR is immaterial

        • Assessed Control Risk is low

        • Confirmation process will be ineffective

      • CAATTs to use for this function?

        • Steps:

        • Select accounts to confirm

        • Consolidate invoices (not AR subsidiary) using CLASSIFY (filter) and SUMMARIZE (amount) [see Tables 9-3 and 9-4]

        • Why?

        • JOIN the CUSTOMER file with the new consolidated invoice file

      • Prepare confirmation requests [see Figure 9-12]

        • Positive and Negative Confirmations (ACL, EXPORT)

      • Evaluating and controlling responses

        • Retain custody of the confirmation letters until mailed

        • The letters should be addressed to the auditor, not client org.

        • The replies should be mailed to the auditor, not client org.

        • Discrepancies should be investigated.

        • Non responses to POSITIVE confirmation should be investigated

IT Auditing & Assurance, 2e, Hall & Singleton


Substantive tests of revenue cycle accounts28 l.jpg

SUBSTANTIVE TESTS OF REVENUE CYCLE ACCOUNTS

  • Valuation/allocation assertion

    • Corroborate or refute AR is stated at reasonable Net Realizable Value

      • AGING AR

        • ACL, AGE [see Table 9-7]

      • Is allowance for doubtful accounts reasonable compared to prior years and based on composition of AR portfolio

        • Confirmation process will be ineffective

      • Review past-due balances

        • Conference with credit manager to determine collectibility

        • Determine if methods used to estimate allowance for doubtful accounts is adequate, not the collectibility of each account

        • Determine if overall allowance is, therefore, reasonable

IT Auditing & Assurance, 2e, Hall & Singleton


Chapter 9 auditing the revenue cycle29 l.jpg

Chapter 9:Auditing the Revenue Cycle

IT Auditing & Assurance, 2e, Hall & Singleton

IT Auditing & Assurance, 2e, Hall & Singleton


  • Login