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Chapter 11. Accounts Receivable, Notes Receivable and Revenue. Controlling customers’ orders Credit approval Issuing merchandise Shipping Billing Adjustments to sales and receivables. Internal Control Over the Revenue Cycle. Customer purchase order Sales order

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Presentation Transcript
internal control over the revenue cycle
Controlling customers’ orders

Credit approval

Issuing merchandise



Adjustments to sales and receivables

Internal Control Over the Revenue Cycle
revenue cycle documents
Customer purchase order

Sales order

Bill of lading


Control listing

Credit memo

Revenue Cycle--Documents
revenue cycle controls
Segregation of duties--sales and collections

Matching of sales invoices and shipping documents

Clerical accuracy checks on invoices

Credit approval for sales transactions

Mailing of monthly statements

Reconciliation of bank accounts

Use of control listing of cash receipts

Use of budgets and analysis of variances

Control over shipping and billing documents

Use of authorized credit memoranda

Use of chart of accounts and review of account codings

Revenue Cycle Controls
objectives for the audit of receivables and revenue
Consider inherent risks of receivables and revenue, including fraud risks.

Consider control risk for receivables and revenue.

Substantiate the existence of receivables and the occurrence of revenue transactions

Establish the completeness of receivables and revenue transactions

Determine that the client has rights to the recorded receivables

Determine that the valuation of receivables and revenue is at appropriate net realizable value

Determine that the presentation and disclosure of receivables and revenue are adequate

Objectives for the Audit of Receivables and Revenue
confirmation of receivables
Receivables should be confirmed, unless:

Accounts receivable are immaterial,

The use of confirmations would be ineffective, or

The auditors’ combined assessment of inherent and control risk is low, and audit risk can be reduced to acceptably low level with substantive tests

Confirmation of Receivables
flowchart of the confirmation process

Develop Audit Objectives

Choose Appropriate

Confirmation Form

Determine the timing

and extent

Identify the information

to be confirmed

Select the accounts

for confirmation


Flowchart of the Confirmation Process


Prepare and Mail

the Requests

Send 2nd requests for

positive confirmations

Perform alternative

procedures for


Resolve exceptions

Document the

procedures and


criteria for recognition of revenue
Persuasive evidence of an arrangement exists

Delivery has occurred or services have been rendered

The seller’s price to the buyer is fixed or determinable

Collectibility is reasonably assured

Source: SEC Staff Accounting Bulletin No. 101.

Criteria for Recognition of Revenue
potential revenue recognition problems
Sales with unusual right to return

Side agreements

Franchise fees

Bill and hold transactions

Sales using notes with unusual interest rates

Percentage-of-completion method of revenue recognition

Multiple element agreements

Potential Revenue Recognition Problems