AUDITING

Session 18
 REVENUE
1. Receive a Customer Purchase Order
2. Check Inventory Stock Status
3. Generate Back Order (A customer order that cannot be filled
when presented, for which the customer is prepared to wait.)
4. Obtain Credit Approval (Policy)
5. Prepare Shipping and Packing Documents
- Picking tickets that tell the staff the most efficient sequence
and location in which to pick items for shipment)
- Separate packing slips are prepared to insert with the
shipment
AMAZON WAREHOUSE
AMAZON WAREHOUSE
 REVENUE CYCLE
6. Ship and Verify Shipment of Goods (shipper prepares
a Bill of Lading that describes the packages to be
conveyed by the common carrier to the customer)
7. Prepare and Send the Invoice
8. Send Monthly Statements to Customers
9. Receive Payments
 IMPORTANT ASSERTIONS
Existence: assets, liabilities, and equity interests exist
Valuation (& allocation): assets, liabilities, & equity
interests are included in the F/S at appropriate
amounts
Completeness: all transactions and events that
should have been recorded have been recorded.
Cutoff: transactions and events have been recorded
in the correct accounting period
Accounts are interrelated: Assertions for REVENEU will
be same for A/R
 OTHER ASSERTIONS
Classification: transactions and events have been
recorded in the proper accounts
Occurrence: transactions and events that have been
recorded have occurred and pertain to the entity
Accuracy: amounts and other data relating to recorded
transactions have been recorded appropriately
Rights and obligations: the entity controls the rights to
assets, and liabilities are the obligations of the entity
 COMPLEX TRANSACTIONS
An Internet travel site to record the full sales price of
airline tickets or the net sales commission?
Shipment of magazines to retail stores is revenue
when delivered or sale or return?
Should revenue be recognized in barter advertising
between two Websites exchanging banner ads?
A bundled product is sold. For example, assume that
a software company sells software bundled with
installation and service for a total of $5,000.
 FRAUD ALERT
Shipments that never occurred (fictitious invoices)
Hidden agreements with irrevocable right to return the product
Recording consignment sales as final sales
Early recognition of sales that occurred after the year-end
Shipment of more product than the customer ordered
Recording shipments to the companys own warehouse as
sales
Shipping goods that had been returned and recording the
reshipment as a sale of new goods
Incorrect aging of accounts receivable and not recording write-
downs of potentially uncollectible amounts
 EXAMPLES
Coca-Cola: Distributers forced to take syrup worth 10m$
Gateway: Recorded free AOL Subscription as revenue
inflating sales by 450m$
K-mart recorder 42.3m$ when it was subject to refund.
Xerox accelerated recognition of revenue on long term leases
and increased sales by 6b$
Lucent Technologies recognized 452m$ of goods that were
sent to distribution partners
GE sold locomotives to banks with agreement to repurchase
223m$ and 158m$
 ASSERTIONS
Check sequence of Invoices (Pre-numbered)
Trace the total of Sales Journal with GL (C)
Trace Sales Invoice to Sales Order and Bill of Lading
Trace Sales Invoice to Receipts (E and O)
Take a sample of Credit notes, trace them to GRN,
trace them to invoices, and ensure they are recorded
Confirm Receivable from Customers
Check subsequent collection after year-end
Review Sales Journal for duplicate entries
 ASSERTIONS
Verify clerical accuracy of sales invoices and agreement of
sales invoices with supporting documents (V)
Confirm balances or unpaid invoices with customers
Review adequacy of the allowance for doubtful accounts
Review revenue recognition policies for appropriateness
and consistency
Perform sales cutoff test invoices and Sales Returns
Check arithmetical accuracy of the sales value. (A)
Trace sales price in the invoice to the price list