Académique Documents
Professionnel Documents
Culture Documents
14-2.
a.
The revenue cycle includes the activities involved in the exchange of goods and
services with customers and the realization of the revenue in cash.
b.
The classes of transactions in this cycle for a merchandising company are sales, sales
adjustments, and cash receipts. The primary accounts affected by these transactions
are sales, accounts receivable, cost of sales, inventory, cash, sales discounts, sales
returns and allowances, bad debts expense, and allowance for uncollectible accounts
a.
Specific audit objectives for the revenue cycle are derived from the five categories of
management's financial statement assertions.
b.
Specific audit objectives for credit sales transactions include the following:
Recorded sales transactions represent goods shipped during the period (existence
or occurrence).
All sales transactions that occurred during the period have been recorded
(completeness).
The entity has the rights to receivables resulting from recorded credit sales
transactions (rights and obligations).
All sales transactions are correctly journalized, summarized, and posted
(valuation or allocation).
The details of sales transactions support their presentation in the financial
statements including their classification and related disclosures (presentation and
disclosure).
14-1
Factors that might contribute to unintentional misstatements in revenue cycle assertions include:
The volume of sales, cash receipts, and sales adjustments transactions is often high,
resulting in numerous opportunities for errors to occur.
The timing and amount of revenue to be recognized may be contentious owing to factors
such as ambiguous accounting standards, the need to make estimates, the complexity of
the calculations involved, and purchasers' rights of return.
14-5. a.
Following are example analytical procedures that the auditor might use to estimate
total revenue for a household appliance manufacturer and for an airline.
Industry
Household Appliance Mfg.
Airline
b.
Two analytical procedures that the auditor might use to estimate gross margin for
company might include.
Analytic Procedure
Compare historical trends in
market share and gross margin
with current unaudited data.
Evaluate the percentage of
revenues coming from new
products.
c.
Audit Significance
Companies with commanding market shares
often are able to obtain larger gross margins.
Companies with a high proportion of revenues
from new products may earn premium gross
margins due to the ability to innovate.
Two analytical procedures that the auditor might use to estimate net receivables and
the allowance for doubtful accounts for company might include.
Analytic Procedure
Audit Significance
2000, John Wiley and Sons, Inc.
14-2
14-6. Several control environment factors and their applicability to revenue cycle assertions are:
The following table summarizes the functions that apply to credit sales transactions, the
department that performs the functions, and the principal documents or records produced in
performing the function.
Department that
Principal documents and records
Function
performs function
produced in performing the function.
Initiating credit Sales department
Documents
sales
Customer Order
Credit department
Sales Order
Computer Files and Records
Customer Master File (with credit
information) and Accounts Receivable
Master File.
Perpetual Inventory
Authorized Price List
Open Order File
14-3
Department that
Function
performs function
Delivering good Warehousing and shipping
and services
department for goods.
Line operating departments
for services.
Recording sales
Accounting (Billing)
14-8. In order to assess control risk as low based on programmed control procedures the auditor
should test the following.
Control
Programmed control procedures
Computer general control
procedures
Manual follow-up procedures.
14-9. The following tables describes programmed controls for a typical manufacturing company.
Potential
Programmed Control
CAATs (Assuming Test Data)
Misstatement
a. Sales invoices may The computer compares
Submit test data for a
not be recorded.
entries in the sales journal
transaction that has shipping
with underlying shipping
information, both with and
information. All shipping
without a supporting sales
documents must be matched invoice.
with a sales invoice.
14-4
b.
c.
d.
Potential
Misstatement
Sales invoice may
be recorded in the
wrong accounting
period.
A fictitious sales
invoice, or a sales
transaction for
which revenue
should not be
recognized, is
recorded.
Sales are made
without credit
approval.
e.
f.
g.
Programmed Control
14-10. A common management control involves having managers with responsibility for sales to
review daily or weekly sales reports to assess the reasonableness of recorded sales. Further
management responsible for warehousing and shipping should review daily or weekly sales
and inventory movement reports to assess the reasonableness of recorded sales and
inventory removed from the perpetual inventory.
14-11. The sub-functions involved in cash receipts include (1) receiving cash receipts, (2)
depositing cash in bank, and (3) recording the cash receipts.
14-5
14-12. a.
Two important controls pertaining to cash sales and the transaction class audit
objectives to which they relate are:
The customer's expectation of a printed receipt and supervisory surveillance of
over the counter sales transactions helps to ensure that all cash sales are
processed through the cash registers or terminals - completeness.
Independent check by supervisor on the accuracy of cash count sheets, and
verification of agreement of cash on hand with totals printed by a cash register or
terminal - existence or occurrence and valuation or allocation.
b.
Two important controls pertaining to the initial handling of mail receipts are (1)
immediate restrictive endorsement of checks received and (2) preparation of a multicopy listing (prelist) of mail receipts.
14-13. a.
A lockbox is a post office box that is controlled by the company's bank. The bank
picks up the mail daily, credits the company for the cash, and sends the remittance
advices to the company for use in updating accounts receivable. This system
eliminates the risk of diversion of the receipts by company employees and failure to
record the receipts.
b.
Depositing receipts intact daily means that all receipts are deposited; that is, cash
disbursements should not be made out of undeposited receipts. This control reduces
the risk that receipts will not be recorded (completeness), and the resulting bank
deposit record establishes the existence or occurrence of the transactions.
14-14. Four controls that can aid in preventing or detecting errors or irregularities in recording cash
receipts are summarized below along with potential tests of controls:
Control
Independent check of agreement of
validated deposit slip with daily cash
summary.
Computer check of information
included in the cash receipts journal
with information from prelist.
Test of Control
Inspect a sample of daily cash summaries and
examine evidence of agreement with validated
deposit slip by responsible employee.
Use CAATs to test computer matching of
information from cash receipts journal with
electronic prelist. Also follow-up on how
exceptions are reported and examine evidence or
correction of errors reported on exception
reports.
Examine a sample of periodic bank
reconciliations. Make inquiries about bank
reconciliation procedures and test accuracy on a
sample basis.
Observe the mailing of monthly statements to
customers. Make inquiries about procedures to
follow-up on issues raised by customers, and
examine reports or other evidence of follow-up.
14-6
14-15. a.
b.
14-16. a.
The transaction classes that should be considered in assessing control risk for
accounts receivable assertions are: credit sales, cash receipts, and sales adjustments.
b.
In assessing control risk for the existence or occurrence account balance assertion for
accounts receivable, the following transaction class control risk assessments should
be considered:
Existence or occurrence for sales transactions that increase accounts receivable.
Completeness for cash receipts and sales adjustments transactions that decrease
accounts receivable.
c.
A revised acceptable level of detection risk for tests of details and a revised level of
substantive tests must be determined for an assertion when the relevant final or
actual inherent risk assessments, control risk assessments, and analytical procedure
risk assessments, differ from the planned assessed levels.
14-7
b.
Factors to be considered in choosing the form of confirmation request are (1) the
acceptable level of detection risk and (2) the composition of the customer balances.
The positive form is used when detection risk is low or individual customer balances
are relatively large. The negative form should be used only when all three of the
following conditions apply:
The acceptable level of detection risk for the related assertions is moderate or
high.
A large number of small balances is involved.
The auditor has no reason to believe that the recipients of the requests are
unlikely to give them consideration.
c.
When no response is received after the second or third positive confirmation request
to a customer, the auditor should apply such alternative procedures as (1) examining
subsequent collections and (2) vouching open invoices comprising the customer's
balance. Alternate procedures may be omitted when both of the following conditions
apply:
There are no unusual qualitative factors or systematic characteristics related to
the nonresponses, such as that all nonresponses pertain to year-end transactions.
The nonresponses, projected as 100% misstatements to the population and added
to the sum of all other unadjusted differences, would not affect the auditor's
decision about whether the financial statements are materially misstated
14-20. a.
The aged trial balance is used primarily in assessing the adequacy of the allowance
for uncollectible accounts.
14-8
b.
Procedures applied to the aged trial balance include (1) footing and crossfooting the
aged trial balance and comparing the total to the general ledger balance for accounts
receivable and (2) testing the aging of the amounts shown in the aging categories by
examining supporting documentation such as dated sales invoices.
c.
After testing the accuracy of the aged trial balance the auditor should perform the
following procedures to draw a conclusion about the fair presentation of the
allowance for doubtful accounts.
Examine past due accounts for evidence of collectability such as correspondence
with customers and outside collection agencies, credit reports, and customers
financial statements.
Discuss collectability of accounts with appropriate management personnel.
Evaluated managements process for estimated the allowance for doubtful
accounts using hindsight.
Evaluate the adequacy of the allowance given information about industry trends,
aging trends, and collection history for specific customers.
d.
Objective Questions
14-22.
14-23.
14-24.
14-25.
1.c
1.c
1.a
1.d
2.d
2.d
2.b
2.a
3.a
3.a
3.c
3.a
4.d
4.d
4.d
4.d
5.b
5.b
5.b
Comprehensive Questions
14-26. (Estimated Time: 15 Minutes)
14-9
The auditor should consider separately audit the revenues associated with the 27 owned
properties and the 40 managed properties.
Revenues for the 27 owned properties represent direct revenues of the motel chain. The auditor
might consider evaluating the summer season separate from the balance of the year as the auditor
will expect occupancy to be high during that time of year and the auditor will also expect that
revenues should reflect higher rates. The auditor would also expect that for the balance of the year
occupancy should be lower and revenues per night will be reduced due to significant price
competition. Knowledge of the industry will be particularly helpful in gauging the reasonableness
of occupancy rates and revenues per unit.
Revenues for the 40 managed hotels will likely be related to management fees based on
revenues earned for absentee owners. The auditor needs to consider the same issues as
above, but also need to determine the appropriateness of the management fee based on the
contract with absentee owners.
14-27. PROBLEM 14-27 WAS INCLUDED IN THE TEXT IN ERROR. THE FLOWCHART ON
PAGE 584 DOES NOT GO WITH THIS PROBLEM. INQDEQUATE INFORMATION IS
AVAILABLE FOR STUDENTS TO SOLVE THE PROBLEM. THE AUTHORS AND
JOHN WILEY EXTEND THEIR APPOLOGIES.
14-28. (Estimated time - 20 minutes)
Internal Control Questionnaire
Question
Yes
1. Are cash registers or point-of-sale devices used for over-the-counter sales?
2. Is there periodic surveillance of cash sales procedures?
3. Are customers who pay by check required to provide identification?
4. Are checks restrictively endorsed on receipt?
5. Is a receipt produced by the cash register given to each customer?
6. Is an independent check made of agreement of cash and checks on hand with
cash count sheets and cash register readings?
7. Is cash deposited intact daily?
8. Is an independent check made of agreement of daily cash register summaries
with validated deposit slips?
9. Is an independent check made of agreement of amounts journalized with daily
cash register summaries and validated deposit slips?
10. Are periodic independent bank reconciliations made?
11. Are employees who handle cash bonded?
No
Recommended Improvement
To extent possible, financial secretary's
responsibilities should be confined to record
keeping.
14-10
Weakness
Recommended Improvement
14-11
Weakness
collections apparently have not been
prepared.
Recommended Improvement
collections is performed by unpaid,
untrained church members, often on a shortterm basis, detailed written instructions
should be prepared.
Documentary
Audit Trail
Key Reports
Customer
Payment
Remittance
Advice
CASH RECEIPTS
PROGRAM:
Updates AR Master
File and Daily
Transaction Tape.
Also Produces
Deposit Slip for
Cash Received
Data
Entry
at
CRT
Accounts
Receivable
File
rece Cash
Receipts
Transaction
File
Deposit
Slip
b.
Yes, the new cash receipts procedures have created some systems and internal
control problems. These problems include the following:
There are some potential control problems in the data entry procedures. The CRT
operator should be restricted to cash receipts processing activities. There should
be safeguards to detect or prevent unauthorized entries to the system.
The old master file records are destroyed in the update process. The company
should keep a backup of the accounts receivable file in case the file is destroyed.
This can be accomplished by periodically dumping the accounts receivable file
on magnetic tape or another disk
There is no assurance that all cash receipts have been entered correctly into the
system. There should be some independent computation of batch and/or hash
totals involving the remittance advices and the number of transactions so that a
comparison at the conclusion of processing would reveal omissions or errors
14-12
The remittance advices The remittance advices are destroyed the next day, which
probably is too soon. Any errors or operator alterations not discovered by the end
of the next business day would be difficult to trace and correct.
b. Financial Statement
Assertion
Valuation or allocation
c. Type of Evidence
Documentary
Existence or occurrence,
completeness, valuation or
allocation
Existence or occurrence,
rights and obligations,
valuation or allocation
Existence or occurrence,
completeness
All except presentation and
disclosure.
Valuation or allocation
Analytical
Existence or occurrence,
rights and obligations,
valuation or allocation
Valuation or allocation
Documentary
Existence or occurrence,
completeness, valuation
All except presentation and
disclosure
Presentation and
disclosure
Existence or occurrence,
completeness
Documentary
Documentary
Documentary
Confirmation
Documentary
Mathematical
Confirmation
Documentary
Documentary
14-13
Cost of
Goods Sold
Transaction
Under Over Under Over
A
2,000
D
4,000
5,600
E
10,000
F
6,000
H
8,000
5,500
Total
14,000 14,000 7,500 5,600
Adjusting Entry
1,900
Cost of Goods Sold
1,900
Inventory
Sales
c.
When no response is received after the second or third positive confirmation request
to a customer, the auditor should apply such alternative procedures as (1) examining
subsequent collections and (2) vouching open invoices comprising the customer's
balance. Alternate procedures may be omitted when both of the following conditions
apply:
14-14
There are two forms of accounts receivable confirmation requests; the positive form
and the negative form. A positive form asks the debtor to respond whether or not the
debtor is in agreement with the information on the confirmation request. A negative
form asks the debtor to respond only if the debtor disagrees with the information on
the confirmation request. The negative form generally requires follow-up by the
auditor in the form of practicable alternative procedures that are used to obtain
necessary evidence. The use of the positive form is preferable when individual
account balances are relatively large, when there is reason to believe that there may
be a substantial number of accounts in dispute or with inaccuracies or irregularities.
The negative form is useful when internal control surrounding accounts receivable is
considered to be effective, a large number of small balances is involved, and the auditor
has no reason to believe that persons receiving the requests are unlikely to give them
consideration.
b.
14-15
14-16
Cases
14-36. (Estimated Time 30 Minutes)
Year 5
Unaudited
535,000
($14,500)
520,500
2,200,000
2,700,000
33,750
22,600
Yar 4
Unaudited
295,000
($6,400)
288,600
1,800,000
2,050,000
25,625
24,500
Year 3
Unaudited
265,000
($5,275)
259,725
1,500,000
1,750,000
21,875
22,500
Year 2
Unaudited
207,500
($5,900)
201,600
1,200,000
1,400,000
17,500
17,000
a. Selected Ratios
Sales to average total as sets
Industry Median
Difference
1.35
1.25
0.10
1.24
1.23
0.01
1.30
1.29
0.01
1.27
1.26
0.01
2.53
0.65
1.15
1.13
55
47
8
49
48
1
48
47
1
48
47
1
AR collection period
Industry Median
Difference
Uncollectable account expense to net credit sales
Industry Median
Difference
Uncollectable account expense to bad debt writeoffs
b.
1.25%
1.50%
-0.25%
1.25%
1.30%
-0.05%
1.25%
1.25%
0.00%
1.25%
1.25%
0.00%
1.493
1.046
0.972
1.029
Year 1
Unaudited
175,000
($5,400)
169,600
1,000,000
1,200,000
15,000
14,000
The unaudited figures for Aurora Manufacturing, Inc. show the following:
There was a significant increase in sales compared to total assets, particularly when
compared to industry averages. This is an indication of possible existence and
occurrence problems as past history of the ratio of total assets to sales would predict
lower sales levels. The auditor should expand the scope of accounts receivable
confirmations.
The collection period is increasing relative to industry averages and past history.
Further, accounts receivable are growing faster than sales. The Aurora continues to use a
historical rate of 1.25% of credit sales to provide for uncollectable accounts while
industry trends show an increase in the rate of bad debts to credit sales. The is an
indication of possible problems of associated with the net realizable value of receivables.
The auditor needs to expand the scope of tests of collection of current receivables, the
allowance for uncollectable accounts, and the provision for bad debt expense.
14-17
14-37. See separate file with answers to the comprehensive case related to the audit of Mt. Hood
Furniture that is included with this chapter.
14-38. See separate file with answers to the comprehensive case related to the audit of Mt. Hood
Furniture that is included with this chapter.
14-39. See separate file with answers to the comprehensive case related to the audit of Mt. Hood
Furniture that is included with this chapter.
Research Questions
For the reasons specified in the introduction to this manual, solutions are not provided for this
category of questions.
14-18