Auditing the Revenue Cycle

Learning Objectives After studying this chapter, you should: Understand the operational tasks associated with the revenue cycle under different levels of technology. Understand audit objectives related to the revenue cycle. Be familiar with revenue cycle control issues related to alternative technologies. Recognize the relationship between revenue cycle audit objectives, controls, and tests of controls. Understand the nature of substantive tests in achieving revenue cycle audit objectives. Be familiar with common features and functions of ACL that are used to perform substantive tests.

Area of Concern (Around the Computer) Obtaining and Recording the Customer’s Orders Approving Credit Processing Shipping Orders

Areas of Concern (through the Computer) Keypunch/ Data Entry Edit Run Sort Run AR Update and Billing Run Sort and Inventory Update Run General Ledger Update Run

Batch Cash Receipts Systems Mailroom Cash Receipts Department AR Department Data Processing Department

Real-Time Sales Order Entry and Cash Receipts Sales Procedures – Check credit – Prepare sales document – Transmit data to warehouse and shipping

Warehouse Procedures – Print data from sales department – Print stock release document – Give goods and a copy of the stock release document to shipping

Shipping and Billing – Reconcile goods, stock release document and copy of packing slip from terminal (which came from the sales department) – Prepare shipping notice, invoice is prepared (open sales order must automatically be cancelled) – Goods are shipped

Collections – Receive cash – Input payment (AR subsidiary file should be automatically updated, and cash receipts journal should also be automatically updated) – Prepare official receipt

Point of Sale Systems POS systems are used extensively in grocery stores, department stores, and other types of retail organizations. In this example, only cash, checks, and bank credit card sales are valid. The organization maintains no customer accounts receivable and inventory is kept on the store’s shelves, not in a separate warehouse. The customers personally pick the items they wish to buy and carry them to the checkout location, where the transaction begins.

Audit Objectives, Controls and Test of Controls

Input Controls Input controls are designed to ensure that transactions are valid, accurate, and complete. – Credit Authorization – Data Validation – Batch Controls – Process Control

Process Controls Process controls include computerized procedures for file updating and restricting access to data. Depending on the level of computer technology in place, process controls may also include physical manual tasks. – File Update Control – Access Control – Physical Control

Physical Control – Segregation of Duties – Supervision – Independent Verification

Output Controls Output controls are designed to ensure that information is not lost, misdirected, or corrupted and that system processes function as intended. – AR Change Report – Transactions Logs

Types of Transaction Logs – Transaction Listings – Log of Automatic Transactions – Unique Transaction Identifiers – Error Listing