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Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition. William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University. Chapter 14 – Auditing the Revenue Cycle. Chapter Overview.

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Modern Auditing:

Assurance Services and the Integrity of Financial Reporting, 8th Edition

William C. Boynton

California Polytechnic State University at San Luis Obispo

Raymond N. Johnson

Portland State University

Chapter 14 – Auditing the Revenue Cycle





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Inherent Risk, Including the Risk of Fraud

  • Management Misstatement of Revenue

    • Overstate revenues

    • Overstate cash and gross receivables

    • Understate allowance for doubtful accounts

  • Other Misstatement Factors

    • Opportunities for error

    • Timing

    • Misclassification

    • Adjustment transactions



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Consideration of Internal Control Components

  • Control Environment

  • Risk Assessment

  • Information and Communication

  • Monitoring

  • Initial Assessments of Control Risk


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Study Break

  • The revenue cycle includes all of the following transactions, except:

    • Credit Sales

    • Cash Receipt

    • Inventory Purchase

    • Sales Returns and Allowances

      C. Inventory Purchase


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Study Break

  • This internal control component should provide management with feedback as to whether internal controls pertaining to revenue cycle transactions and balances are operating as intended.

    • Monitoring

    • Initial Assessments of Control Risk

    • Information and Communication

    • Control Environment

      A. Monitoring


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Control Activities for Credit Sales Transactions

  • Credit Sales Orders

    • Over-the-Counter

    • Mail Order

    • Internet

  • Computerized Accounting System

    • General Controls

    • Application Controls


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Common Documents and Records

  • Customer Order

  • Sales Order

  • Shipping Document

    • Bill of Lading

    • Packing Slip

  • Sales Invoice

  • Authorized Price List


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Common Documents and Records

  • Sales Transactions File

  • Sales Journal

  • Customer Master File

  • Accounts Receivable Master File

    • Accounts receivable subsidiary ledger

  • Customer Monthly Statement


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Function and Control Activities

  • Authorizing Sales

    • Accepting Customer Orders

    • Approving Credit

  • Delivery of Goods and Services

    • Filling Sales Orders

    • Shipping Sales Orders

  • Recording Sales





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Study Break

  • This document is a journal listing of the completed sales transactions.

    • Sales invoice

    • Sales transactions files

    • Authorized price list

    • Sales journal

      D. Sales journal


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Study Break

  • This document shows the description, quantity, and other data pertaining to a customer order.

    • Customer order

    • Sales order

    • Shipping document

    • Sales invoice

      B. Sales order


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Cash Receipts Transactions – Common Documents and Records

  • Remittance Advice

  • Prelist

  • Cash Count Sheets

  • Daily Cash Summary

  • Validated Deposit Slip

  • Cash Receipts Transactions File

  • Cash Receipts Journal


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Cash Receipts Transactions - Functions

  • Receiving Cash Receipts

    • Over-the-Counter Receipts

    • Mail Receipts

  • Depositing Cash in Bank

    • Deposited intact daily

  • Recording the Receipts


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Sales Adjustment Transactions – Common Documents and Records

  • Sales return authorization

  • Authorization for accounts receivable write-off

  • Receiving report

  • Credit memo

  • Journal entry

  • Cash Receipts journal


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Sales Adjustment Functions and Controls Records

  • Granting Cash Discounts

  • Granting Sales Returns and Allowances

  • Determining Uncollectible Accounts

  • Other Controls

  • Tests of Controls


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Study Break Records

  • This cash receipts transaction document is a listing of cash receipts received through the mail.

    • Remittance advice

    • Prelist

    • Daily cash summary

    • Validated deposit slip

      B. Prelist


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Study Break Records

  • All of the following are sales adjustment functions, except:

    • Granting cash discounts

    • Determining uncollectible accounts

    • Recording the cash receipts

    • Granting sales returns and allowances

      C. Recording the cash receipts


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Substantive Tests of Accounts Receivable Records

  • Determining Detection Risk for Tests of Details

    • Existence and Occurrence

    • Completeness

    • Rights and Obligations

    • Valuation and Allocation

    • Presentation and Disclosure


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Designing Substantive Tests Records

  • Initial Procedures

  • Analytical Procedures


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Designing Substantive Tests Records

  • Tests of Details of Transactions

    • Vouch Revenue Transactions

    • Trace Revenue Transactions

    • Perform Cutoff Tests

      • Sales Cutoff Tests

      • Sales Return Cutoff Tests

    • Perform Cash Receipts Cutoff Test


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Designing Substantive Tests Records

  • Tests of Details of Balances

    • Confirm Receivables

    • Forms of Confirmation

      • Positive Confirmation

      • Negative Confirmation

    • Timing and Extent of Requests

    • Controlling the Requests


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Designing Substantive Tests Records

  • Tests of Details of Balances

    • Disposition of Exceptions

    • Alternative Procedures for Dealing with Nonresponses

    • Summarizing and Evaluating Results

    • Applicability to Assertions


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Designing Substantive Tests Records

  • Tests of Details of Accounting Estimates

    • Allowance for Doubtful Accounts

    • Aged Trial Balance

  • Tests of Details of Disclosures


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Study Break Records

  • This type of confirmation requires a debtor to respond only when the amount shown is incorrect.

    • Positive Confirmation

    • Negative Confirmation

    • Avoidance

    • Existence

      B. Negative Confirmation


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Study Break Records

  • This cutoff test is designed to obtain reasonable assurance that cash receipts are recorded in the accounting period in which received.

    • Sales cutoff test

    • Sales return cutoff test

    • Vouching revenue transactions

    • Cash receipts cutoff test

      D. Cash receipts cutoff test


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