Revenue Cycle

Audit of the Revenue Cycle
Test of Controls


Typical Transactions in the Sales and
Collection Cycle
Five major classes of Transactions:
• Sales
• Cash receipts
• Sales returns and allowances
– Technically two distinct transactions

• The write-off of uncollectible accounts

• Bad-debt expense

2


An Overview of Functions, Documents, and
Accounting Systems
It is important to notice the separate departments. It shows good segregation of duties.

• Order Entry Department

= Good control point

– The starting point
By phone,
internet or
mail

Signed by the customer,
except for telephone or
internet orders.

Sales order 1

2

3

Credit Manager signs the
sales order for credit
approval
3


Okra Development Corp.

Copy

Purchase Order 6-3378

8924 Bailey Road
Salem, OR 92117

Date:
Ship By:
Terms:

To:
Faragut Sales, Inc.
3812 Briar Drive
Salem, OR 92115
Quantity

Number

10

Model 317

August 5, 201X
September 12, 201X
2/10, n/30
FOB Shipping Point

Ship to:
Okra Development Corp.
8924 Bailey Road,
Salem, OR 92117
Description

Roller Bearing for

Price

Amount

48.00

480.00

Model 3118 Ripper

Purchase order number must appear
on all shipments and invoices

Spangler

Ordered By

Margaret
4


Prenumbered Sales Order. Controlled
numerically

5


• Shipping involves the Shipping Department

Approved by Credit Manager.

Order
Entry
Approved
Sales

Order

Billing and
A/R

Prepare Multi-Part
Bill of Lading
Customer

A legal document that the
carrier is required to have.

Common
Carrier

Always useful to have a
numerical file. Kept in
Shipping. Dept.
6


Prenumbered Bill of Lading. Controlled
numerically

7


• Sales order & Bill of Lading goes to
• Billing/Accounts Receivable Department
A numerical file that shows

approval of the sale, proof of
shipment, and billing. Good
for testing internal controls.

Pricing checked.
Account coding
checked.

Shipping
Department

SO

Authorized
Price List

BL
INV
INV

Summary
by invoice
number.

N

Prepare Sales
Invoice & Sales
Summary

INV

Cost Department
for Perpetual
Inventory

Sales
Summary
General
Accounting

Customer
8


Faragut Sales, Inc.

D8-9912

Copy

3812 Briar Drive, Salem, OR 92115

Sales Invoice

Prenumbered Sales Invoice. Controlled
numerically

Sold

Shipped to

Freight Bill No.

Okra Development Corp.
8924 Bailey Road
Salem, OR 92117

8924 Bailey Road
Salem, OR 92117

229-237441

FOB Shipping Point

Quantity

10

We are pleased to serve you

Model 317
Key controls. Initials are
evidence of control
being performed. In
total or sample.

Price

48.00

Pricing and Math

Amount

480.00

J.D.

Account Coding

S.A.L .

9


10


• Cash Collection
• Receptionist/Mail Room Clerk

Customer

Remittance Advice

Deposits prepared by a
person separate from the
one who opens the mail.

Invoice Copy

Remittance Advice

Cheque

Invoice
Cheque
List

Prepare List of
Cash Received
(2 copies)

List

Cashier

Control Copy to
General
Accounting

Two separate
listing going to
two different
places for later
cross checking

11

Notice the complete
details on the
remittance Advice

If the remittance advice is not returned, the person opening
the mail should prepare one so that each cheque received
is represented by a remittance advice complete with all
pertinent details.
12


15642
September 5, 201X

Also called a pre-listing
of cash receipts

Cash Receipts Listing
Fountain City Warehouse

x,400.00

Charlotte Sawyers, Inc.

x,295.00

Brown, Inc.

1,200.00

Okra Development Corp.

x,470.40

Toil Incorporated

x,490.00

Harreleson Hardware

1,872.80

Barnaby Sales, Inc.

x,982.00

Hartfords

x,x92.00

J.T.Lockett

Adding Machine Tape
x,120.00
x,x98.32
x,x23.66
x,842.33
x,988.11
3,130.40

5,802.20

Preparer

All cash receipts should be
listed on the pre-listing from
the remittance advices.

September 5, 201X
Cash Summary
Cash Receipts Listing

5,802.20

Over-the-counter cash receipts

3,130.40
8,932.60

13


• Cash must be deposited in the Bank
• Cashier
Once again, a separate
dept.
Remittance Advice

Mail Clerk

List of Receipts
Remittance Advice

Invoice Copies

List of Receipts

Cheques

CR Summary
CR Summary
Cheques

Prepare Deposit
Slip & Cash
Receipts Summary

A/R to update
A/R Sub-Ledger

Deposit Slip

General
Accounting

Bank

All cash receipts should be
deposited daily

Distribution going to
separate depts. For
reconciliation

14


Prepared by cashier,
separate from the
receipt of cash by
Receptionist

P.L.

Initialed by cashier

15


Page 112
Date

August 25

CASH RECEIPTS JOURNAL
Customer Name

Okra Development Corp.

Cash

470.40

Sales

Account Receivable

Discount

Credit

9.60

480.00

16


• The Accounts Receivable Sub-Ledger must be updated
• A/R Department
Bank
Cashier

Duplicate Deposit
Slip

Remittance Advice

List of Receipts

Notice that the posting to the
accounts is separate from
collection of cash, and deposit in
the bank.

CR Summary
Subsidiary
customer
accounts posted
from remittance
advices.

Post to the Customer
Account & Prepare
Trial Balance

Daily remittance list compared to
duplicate deposit slip received from
bank by person independent of
either function.

Trial Balance

D

General Accounting for
comparison to the G/L
17

• The Role of General Accounting

Post to the general
ledger using data
obtained from other
depts.

A/R Dept.

Subsidiary customer
accounts posted from
remittance advices.

Sales
Summary
List of Receipts

Post to the General
Ledger

CR Summary

Mail Clerk

There should be a monthly reconciliation of
control account to customers' individual
accounts and bank statement reconciled
promptly.

Cashier

18


Typical Documents and Records
• Sale is initiated with a
• What documents accompany the sale?

• Routine reports
– include a sales journal
– aged accounts receivable trial balance
– Anything else?
19


The Accounts of the Sales and Collection Cycle
Gross
sales

Cash in bank

Cash
Sales
Sales on
Account

Accounts receivable
Beginning
balance

Sales on
account
Ending
balance

Cash receipts
Cash discounts
taken

Sales returns
and allowances
Charge-off of
uncollectible
accounts
Allowance for
uncollectible accounts
Charge off of
uncollectible
accounts

Sales returns
and allowances

Beginning
balance
Bad debts
Ending
balance

Bad debts

20


Methods of Recording Transactions
• Manual recording
• Entered in batches

• Recorded one transaction at a time

21


Control Differences Between Batch and Online
Systems
Batch systems:
• Transactions readily
traced

• Groups of transactions are
totaled

Online systems:
• Transactions recorded one
at a time

• Document sequencing is
important

22

Control Differences For Error Detection and Correction
Batch systems:
• one erroneous transaction
• Error follow-up is
required

Online systems:
• Focus is on preventing
errors
• Input edit check for valid
customer data and
reasonableness

23


Batch and Online Systems: Segregation of Duties

Batch systems:

Online systems:

• Separate

•

In decentralized systems

• Reconciliation and error
follow-up

•

Use passwords to separate

24


Risk Assessment and the Sales Cycle
Why do risk assessment?

Risk Type

Impact upon Sales and Collection Cycle

Client business risk

Increased client business risk could lead to greater risks of misstatement of
sales.

Audit risk

As audit risk decreases, the level of assurance required increases, and the
extent of testing required increases.

Inherent risk - overall

As inherent risk increases, the extent of testing required increases; inherent

risks associated with the handling of cash directly affect certain audit
assertions in sales (e.g. completeness).

Risk of material
misstatement - overall

Management biases due to bonus incentives or stated earnings forecasts
could increase the extent of testing.

Risk of fraud - overall

Poor fraud risk management could result in increased risk of fraud, with a
need to increase the extent of testing.

Identify significant risks

Revenue recognition is considered a significant risk unless the auditor has
evidence to the contrary; this means that controls over revenue recognition
need to be assessed and increased testing is required of assertions that
affect revenue recognition.

Remember that as risk increases
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