1. Electronic Presentations in Microsoft® PowerPoint®
Prepared by
Brad MacDonald
SIAST
© 2003 McGraw-Hill Ryerson Limited
Page references in these notes are taken from the second draft of the text revision

2. Revenue and Collection Cycle
This chapter contains a concise overview of a cycle for processing customer orders and making sales, delivering goods and services to customers, accounting for customer accounts receivable, collecting and depositing cash received from customers, and reconciling bank statements. A series of short cases is used to show the application of audit procedures in situations where errors, irregularities and frauds might be discovered. The chapter ends with special technical notes on the existence assertion, using confirmations and auditing bank reconciliations.

3. Learning Objective 1
Describe the revenue and collection cycle including typical source documents and controls.

4. Revenue and Collection Cycle: Typical Activities
Refer to Exhibit 9-1
Revenue cycle activities include:
Receive and process customer orders.
Deliver goods and services to customers.
Bill customers and account for receivables.
Collection cycle activities include:
Collect and deposit cash.
Reconcile bank accounts.
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5. Revenue and Collection Cycle
Start Here
Collections
Customer Orders
Revenue and Collection Cycle
Bill Customers
Credit Granting
See exhibit 9-1
Warehousing Shipping and Delivery
Chapter 9 5
Copyright © 2003 McGraw-Hill Ryerson Limited

6. Revenue Cycle: Typical Activities
Authorization: regular customer, credit check, inventory available, packing slip - release goods, price master file
Custody: storeroom, warehouse, shipping department, accounts receivable (edit), logs maintained
Recording: shipment complete - invoice, bill of lading, remove order from pending file
Periodic Reconciliation: unpaid invoices to accounts receivable - aged trial balance
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7. Collection Cycle: Typical Activities
Authorization: lock box, discounts, allowances
Custody: mail opening teams, remittance list, cashier, cash receipt to customer, lock box, treasurer’s office, deposit, list to the bank
Recording: accountants record cash, but don’t handle cash, use remittance list, post subsidiary A/R and G/L with separate people
Periodic Reconciliation: bank reconciliations, compare deposits to remittances, compare cheques to cash disbursements journal, trace to subsidiary ledger
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8. Audit Evidence in Management Reports and Data Files
Pending order master file (completeness)
Credit check files (up-to-date maintenance)
Price list master file (must be correct for billing)
Sales detail (sales journal) file (compare to shipments and dates)
Sales analysis reports (by product line, by employee and investigate unusual items)
Accounts receivable aged trial balance (assessing bad debts and accounting for balances)
Cash receipts journal (deposits, receipts, adjusting entries re bank)
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9. Learning Objective 2
Give examples of detail test of controls procedures for auditing control over customer credit approval, delivery, accounts receivable accounting, cash receipts accounting, and bank statement reconciliation.

10. Control Risk Assessment
Control risk assessment governs the nature, extent, and timing of substantive audit procedures applied in the audit of account balances in the revenue and collection cycle.
Accounts include:
cash in bank
accounts receivable
allowance for
doubtful accounts
bad debt expense
sales revenue
sales returns allowances and discounts
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11. Control Risk Assessment
General Control Considerations:
Ensure proper segregation of responsibilities.
Consider bonding of key employees.
Control structure should provide for detailed checking of business rules and/or policies.
Control information is collected through an internal control questionnaire or by conducting a walk-through.
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12. Detailed Test of Controls
Tests of controls should address all of the control objectives.
Cut-off is important to revenue cycle.
Tests include identification of population and expression of the action to be taken.
Note dual direction of testing for completeness and validity requires selection of sample from appropriate population.
See Exhibit 9-6 for procedures.
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13. Control Risk Assessment
The purpose of testing controls is to determine nature, extent, and timing of substantive procedures.
Good controls – low control risk:
Smaller sample sizes, earlier timing for substantive tests.
Poor controls – high control risk:
Larger samples, more work at year end.
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14. Learning Objective 3
Describe some common errors, irregularities, and frauds in the revenue and collection cycle, and design some audit and investigation procedures for detecting them.

15. Substantive Procedures
Audit procedures to gather direct evidence on account balances are called substantive procedures.
recalculation, observation, confirmation, enquiry, vouching, tracing, scanning, analytical review
detailed list in Appendix 9B
Dual purpose procedures – gain substantive purpose evidence and control purpose evidence with the same test.
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16. Casettes – Substantive Procedures
Specific examples of test of controls and substantive procedures are in the form of casettes (mini-case studies).
Each case has the following parts:
Method
Paper Trail
Amount
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Audit Approach
Audit Objective
Control
Test of Controls
Audit of Balance

17. Audit Casettes: Substantive Audit Procedures
9.1 The Canny Cashier
Problem: Cash embezzlement caused overstated accounts receivable, overstated customer discounts expense and understated cash sales. Company failed to earn interest income on funds “borrowed.”
9.2 The Taxman Always Rings Twice
Problem: Overstated receivables for property taxes in a school district because the tax assessor stole some taxpayer payments.
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18. Audit Casettes: Substantive Audit Procedures
9.3 Bill Often, Bill Early
Problem: Overstated sales and receivables understated discounts expense and overstated net income resulted from recording sales too early and failure to account for customer discounts taken.
9.4 Thank Goodness It’s Friday
Problem: Overstated sales caused overstated net income, retained earnings, current assets, working capital and total assets. Overstated cash collections did not change the total current assets or total assets, but they increased the amount of cash and decreased the amount of accounts receivable.
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19. Learning Objective 4
Explain the importance of the existence assertion for the audit of cash and accounts receivable, and describe some procedures for obtaining evidence about the existence of assets.

20. Special Note: The Existence Assertion
For accounts receivables and other assets, auditors place emphasis on existence and rights assertions.
Recalculation
Focus on assets that depend largely on calculations.
Physical observation
Inventories and assets can be examined, title documents can be vouched, security documents can be inspected.
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21. Special Note: The Existence Assertion
Confirmation
Bank accounts, receivables can be confirmed.
Assets at other locations or in the hands of custodians can also be confirmed.
Verbal enquiry
Enquire as to agreements regarding minimum balances, pledging of receivables, pledging of other assets.
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22. Special Note: The Existence Assertion
Examination of documents (vouching)
Examine title documents, collateral, pledges.
Scanning
Look for misclassified assets, uncharacteristic balances, errors or overpayments, or related party transactions and balances.
Analytical procedures
Comparison of assets to related revenues or expenses, expenses with revenues, contra revenues with revenues, write-offs.
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23. Learning Objective 5
Identify and describe considerations for using confirmations in the audit of cash and accounts receivable.

24. Special Note: Using Confirmations
Confirmations of cash and loan balances:
Confirmation is considered to be a required generally accepted audit procedure.
The standard bank confirmation form is used to obtain confirmation of deposit and loan balances. There are sections for
deposits and overdrafts
loans and other direct or contingent liabilities
exceptions and comments
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25. Confirmation of Accounts and Notes Receivable
Confirmation can provide evidence about existence and valuation.
Positive confirmation / negative confirmation
response rate
detection rate
Summary: confirmations
Required unless auditors can justify substituting procedures.
Note that other procedures are required to assess collectibility.
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26. Learning Objective 6
Design and perform substantive audit procedures for the audit of a bank statement reconciliation, and tell how auditors can search for lapping and kiting.

27. Audit of Bank Reconciliation
Bank reconciliations are audited 100%:
Bank balance is confirmed with bank.
The reconciliation is recalculated and re-footed.
Reconciling items are vouched 100% to supporting documentation.
The auditor obtains cutoff bank statement directly from the client’s bank.
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28. Accounts Receivable Lapping
See “Canny Cashier” Casette 9.1
Audit will include comparison of cheques on a daily deposit slip to the detail of customer accounts credited on that day.
Looking for a customer credited for whom no payment received.
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29. Cheque Kiting
Deliberate floating of funds using “hot cheques” to create apparent cash balances.
The depository bank does not know the cheque is on insufficient funds, and the deficiency will be covered by a second hot cheque.
Uses the time required for cheques to clear to obtain an unauthorized short-term loan.
Auditor will review all interbank transfers.
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30. Appendix 9A Internal Control Questionnaire -- Cash Receipts Processing
Internal Control Questionnaire -- Sales
Internal Control Questionnaire -- Accounts and Notes Receivable
Sales and Accounts Receivable Computer Controls

31. Appendix 9B Audit Program -- Selected Substantive Procedures -- Cash
Audit Program For Accounts and Notes Receivable and Revenue: Selected Substantive Procedures