Share on Facebook Accounts receivable is part of the "current assets" section on a company's balance sheet. It represents the balance owed by customers for products sold or services rendered.
The inherent risk for this cycle is related to the cutoff dates for particular types of sales and the pressures from management to misstate revenues. By conducting so-called substantive tests and tests of controls, the auditor can provide some assurance that the revenues of the company are recorded accurately.
Issues Revenue recognition issues usually stem from consignment sales, round-trip sales, refund and return rights, gross sales and bill and hold transactions. Sometimes management feels pressure to misstate revenues to encourage investors or impress upper-level management or the board of directors.
Other times it is simply a case of human error and recording the revenue at the wrong time. Before performing the audit, the auditor should develop an understanding of both the entity and industry in which the organization operates so he can better assess the outcome of the auditing procedures.
Analytical Procedures Analytical procedures often include running various financial ratios and comparing them to industry benchmarks. For the revenue cycle, the auditor examines the gross profit margin and the amount of growth that the company has experienced in one year.
As part of the analytical procedures, he should analyze the organization's maximum capacity for sales if its facility and employees were fully utilized. He must also examine the accounts receivable account to ensure it is not outgrowing sales.
If it is, this could indicate that the company is a credit risk and may have cash flow problems in the future. Tests of Controls The main component for the internal controls of an organization, no matter which cycle they are pertinent to, is management's adoption and adherence to high ethical standards and strong controls.
Tests of controls for the revenue cycle include who accepts and approves credit sales; the separation of duties for filling out, shipping, and recording sales orders; appropriate documentation for collecting and depositing cash and recording the receipts; the appropriate authority and documentation to grant discounts for early or cash payments and sales returns; and management authorization to determine that an account is uncollectible and should be written off to bad debts.
Sustantive Tests Performance of substantive tests will help to find any errors or misstatements within the accounts or documentation associated with the revenue cycle. These tests include checking the trial balance that the accountant creates at the end of the cycle, confirming receivable amounts with the company or person who owes money and evaluating the accuracy of the allowance for uncollectible accounts by reviewing the history of the entity.
They also include vouching, tracing and performing cutoff tests for all sales, sales returns and cash receipts. To do this, the auditor examines all documentation related to a customer and also examines a journal entry; she then either works forward from the initial sales order to the journal entry or backward from journal entry to initial sales order to determine accuracy.
References 1 "Modern Auditing: She has bachelor's degrees in political science from North Carolina State University and in accounting from University of Phoenix.AUDIT OF SALES AND ACCOUNT RECEIVABLES.
Uploaded by. Mohd Dani. AUDITING THE REVENUE PROCESS AUDIT I Prepared by: Siti Hajar Asmah bt Ali REVENUE RECOGNITION Revenue is defined as the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity.
Audit procedures to obtain audit evidence can include inspection, observation, confirmation, recalculation, reperformance, and analytical procedures, often in some combination, in addition to inquiry.
Mar 21, · Substantive Analytical Procedures: Revenue, Cash, and A/R Substantive Analytical Procedures – the comparison of quantitative relationships among account balances and other indicators to an auditor’s expectations.
Footnotes (AS - Audit Evidence): 1 AS , Evaluating Audit Results, establishes requirements regarding evaluating whether sufficient appropriate evidence has been obtained. AS , Audit Documentation, establishes requirements regarding documenting the procedures performed, evidence obtained, and conclusions reached in an audit.
Sustantive Tests. Performance of substantive tests will help to find any errors or misstatements within the accounts or documentation associated with the revenue cycle. July GAO/PCIE Financial Audit Manual Forward-1 Financial Audit Manual Foreword On behalf of the General Accounting Office (GAO) and the President’s Council on Integrity to be effective, the extent of substantive testing can be reduced The methodology includes guidance on.