1. AUDITING THE REVENUE PROCESS

2. Major Processes in the Sales & Collections Cycle
Sale of goods and services (Revenue)
Payments received for goods and services (Collection)
Goods returned by and claims received from customers (Returns)

3. Steps in the Revenue Process
Receiving customer orders
Authorizing credit terms and shipment
Confirming orders
Executing orders
Recording the shipments or services performed

4. Steps in the Revenue Process (Cont.)
Receiving customer orders
Computer controls:
Customer checks
Valid customer number
Self-check algorithm
Field checks
Key characteristics
Completeness of required fields
Reasonableness checks
Order quantities
Product combinations
Clear procedures for resolving computer red flags
Periodic reports on Open Orders

5. Steps in the Revenue Process (Cont.)
Authorizing credit terms and shipment
Computer controls
Credit check for repeat customers
Inventory availability
Credit review for new customers
Credit worthiness
Existence
Separation of Credit & Sales Departments
When approved a Sales Order is produced
Prenumbered and controlled

6. Steps in the Revenue Process (Cont.)
Confirming orders
Customer verification of sales order accuracy
Items
Quantities
Price
Confirm shipping date

7. Steps in the Revenue Process (Cont.)
Executing orders
Assembling goods for shipment
Picking list (sales order)
Verify items picked and update inventory
Move items to shipping dock
Ship ordered goods
Packing slip (sales order)
Verify items packed (agree picking & sales order)
Shipping report and bill of lading
Prenumbered and controlled
Periodic reports on Open Shipments
Separation of Warehousing & Shipping

8. Steps in the Revenue Process (Cont.)
Bill the customer and record the sale
Agree information on and existence of customer order, sales order, and shipping report.
Prepare a Sales Invoice
Prenumbered and controlled
Computer controls
Send sales invoice to customer
Investigation of missing or repeated document numbers

9. Understanding the Entity & Its Environment
Develop an expectation concerning total revenues and gross margin based on general economy, competitive environment, and market position.
Identify and understand difficult revenue recognition issues:
Long-term construction/contracts
Bundled services/revenues
Potential for unearned revenue and collection difficulties

10. Inherent Risks General incentive to overstate revenues and receivables
High volume of transactions
Efforts to increase customer value, may increase accounting complexity:
Bundled services
Rights of return
Financing options

11. Entity-Level Controls
Control Environment:
Integrity & Ethical Values
Management Aggression
Revenue and profit centered incentives
Revenue recognition policies
Competence and Commitment
Various control responsibilities
Accounting personnel
Audit committee/BOD
Risk Assessment:
What has been identified and what actions have been taken?
Changes to the environment (Competition, Regulation, Reporting Req.)?
Additional monitoring, training, incentives, or reports?
Monitoring:
Verify that monitoring activities are operating effectively.
Consider any problems uncovered that could impact the audit of revenues:
Billing errors
Regulatory inquiry
Actions to address previous auditor concerns

12. Auditor Objectives Transaction Objectives
Occurrence: Recorded sales represent goods shipped during the period.
Completeness: All sales made during the period were recorded.
Accuracy: All sales are accurately valued using GAAP and correctly journalized, summarized, and posted.
Cutoff: All sales have been recorded in the correct accounting period.
Classification: All sales have been recorded in the proper accounts.
Balance Objectives:
Existence: Accounts receivable represents amounts owed by customers on the balance sheet date.
Completeness: Accounts receivable includes all claims on customers at the balance sheet date.
Rights & Obligations: Accounts receivable at the balance sheet date represents legal claims of the entity on customers for payment.
Valuation & Allocation: Accounts receivable represent gross claims on customers at the balance sheet date, and agrees with the sum of the accounts receivable subsidiary ledger.

13. Potential Misstatements
Transaction Objectives
Occurrence: (Overstatement)
A single sales invoice recorded twice or a cancelled sales invoice recorded.
Fictitious customer and sale recorded.
Shipments without the consent and agreement of the customer.
The earnings process is not complete:
Recording a sale before shipment or other prerequisites of being earned.
Unearned revenue recorded as earned.
The amount may not be realizable:
Substantial uncertainty exists about collectibility.
Customer obligations are contingent on other actions (financing, resale, etc.).
Completeness: (Understatement)
Shipped orders have not been billed and recorded.
Accuracy:
Transactions are recorded for incorrect amounts (Over- and Understatements).
Cutoff:
Books left open too long (Overstatement) or closed too early (Understatement).
Classification:
Transactions are recorded in incorrect accounts (Over- and Understatements).

14. Objectives & Controls Activities
Transaction Objectives
Occurrence:
Sales invoice sequencing (double entry)
Customer validity check (not fictitious)
Authorized customer order and shipping document (not fictitious & earning process complete)
Credit check (collectibility)
Completeness:
Prenumbered and controlled documents
Accuracy:
Computer input controls
Authorized customer order and shipping document (independent agreement)
Posting and updating of accounts done automatically through computer technology
Cutoff:
Periodic review of Open files
Classification:
Are there any special financing arrangements or rights of return?
What are the control procedures for cancelled orders?
How likely are unearned revenues, and what are the client’s control procedures for these liabilities?
What did we miss?

15. Tests of Controls & Tests of Transactions
Transaction Objective
Test of Control
Substantive Tests
Occurrence
Computer-assisted auditing techniques (CAATs)
Examine Sales Invoice packets for supporting documentation
Review sequence of sales invoices
Review journal for unusual transactions
Vouch from the sales journal to the supporting documents
Completeness
Account for sequence of shipping documents
Observe and review evidence for document control
Trace from the shipping documents to the sales journal
Accuracy
CAATs
Confirm agreement between supporting documentation sources
Recalculate prices and extensions on sales invoice
Trace a few transactions from inception to completion
Cutoff
Account for sequence of supporting documents.
Confirm period reviews of open files
Analyze Sales Invoices and Shipping Documents close to year end to confirm appropriate recording
Classification
Trace transactions from Sales Invoice to the Sales Journal, verifying appropriate classification

16. Analytical Procedures & Tests of Balances
Transaction Objective
Analytical Procedures
Substantive Tests
Existence
Compare gross margins w/ prior years
Consider monthly sales over time
Compare A/R turnover w/prior years
Review subsidiary ledger for unusual amounts
Confirm receivables
Alternative procedures
Completeness
Trace from the A/R master to the aging schedule
Rights & Obligations
N/A
Review BOD minutes for A/R pledging or factoring
Review material sales contracts for terms and conditions
Inquire of management
Valuation & Allocation
Compare bad debts to prior years
Compare allowance account to prior years
Compare A/R turnover w/ prior years
Compare amounts in aging categories w/ prior years
Inquire as to likelihood of collection for older accounts
Assess appropriateness based on independent estimates and other knowledge obtained regarding collection

17. Questions?