1. Modern Auditing:
Assurance Services and the Integrity of Financial Reporting, 8th Edition
William C. Boynton
California Polytechnic State University at San Luis Obispo
Raymond N. Johnson
Portland State University
Chapter 14 – Auditing the Revenue Cycle

2. Chapter Overview

3. The Revenue Cycle

4. Develop Audit Objectives

5. Inherent Risk, Including the Risk of Fraud
Management Misstatement of Revenue
Overstate revenues
Overstate cash and gross receivables
Understate allowance for doubtful accounts
Other Misstatement Factors
Opportunities for error
Timing
Misclassification
Adjustment transactions

6. Analytical Procedures

7. Consideration of Internal Control Components
Control Environment
Risk Assessment
Information and Communication
Monitoring
Initial Assessments of Control Risk

8. Study Break
The revenue cycle includes all of the following transactions, except:
Credit Sales
Cash Receipt
Inventory Purchase
Sales Returns and Allowances
C. Inventory Purchase

9. Study Break
This internal control component should provide management with feedback as to whether internal controls pertaining to revenue cycle transactions and balances are operating as intended.
Monitoring
Initial Assessments of Control Risk
Information and Communication
Control Environment
A. Monitoring

10. Control Activities for Credit Sales Transactions
Credit Sales Orders
Over-the-Counter
Mail Order
Internet
Computerized Accounting System
General Controls
Application Controls

11. Common Documents and Records
Customer Order
Sales Order
Shipping Document
Bill of Lading
Packing Slip
Sales Invoice
Authorized Price List

12. Common Documents and Records
Sales Transactions File
Sales Journal
Customer Master File
Accounts Receivable Master File
Accounts receivable subsidiary ledger
Customer Monthly Statement

13. Function and Control Activities
Authorizing Sales
Accepting Customer Orders
Approving Credit
Delivery of Goods and Services
Filling Sales Orders
Shipping Sales Orders
Recording Sales

14. System Flowchart – Credit Sales

15. System Flowchart – Credit Sales

16. System Flowchart – Credit Sales

17. Study Break
This document is a journal listing of the completed sales transactions.
Sales invoice
Sales transactions files
Authorized price list
Sales journal
D. Sales journal

18. Study Break
This document shows the description, quantity, and other data pertaining to a customer order.
Customer order
Sales order
Shipping document
Sales invoice
B. Sales order

19. Cash Receipts Transactions – Common Documents and Records
Remittance Advice
Prelist
Cash Count Sheets
Daily Cash Summary
Validated Deposit Slip
Cash Receipts Transactions File
Cash Receipts Journal

20. Cash Receipts Transactions - Functions
Receiving Cash Receipts
Over-the-Counter Receipts
Mail Receipts
Depositing Cash in Bank
Deposited intact daily
Recording the Receipts

21. Sales Adjustment Transactions – Common Documents and Records
Sales return authorization
Authorization for accounts receivable write-off
Receiving report
Credit memo
Journal entry
Cash Receipts journal

22. Sales Adjustment Functions and Controls
Granting Cash Discounts
Granting Sales Returns and Allowances
Determining Uncollectible Accounts
Other Controls
Tests of Controls

23. Study Break
This cash receipts transaction document is a listing of cash receipts received through the mail.
Remittance advice
Prelist
Daily cash summary
Validated deposit slip
B. Prelist

24. Study Break
All of the following are sales adjustment functions, except:
Granting cash discounts
Determining uncollectible accounts
Recording the cash receipts
Granting sales returns and allowances
C. Recording the cash receipts

25. Substantive Tests of Accounts Receivable
Determining Detection Risk for Tests of Details
Existence and Occurrence
Completeness
Rights and Obligations
Valuation and Allocation
Presentation and Disclosure

26. Designing Substantive Tests
Initial Procedures
Analytical Procedures

27. Designing Substantive Tests
Tests of Details of Transactions
Vouch Revenue Transactions
Trace Revenue Transactions
Perform Cutoff Tests
Sales Cutoff Tests
Sales Return Cutoff Tests
Perform Cash Receipts Cutoff Test

28. Designing Substantive Tests
Tests of Details of Balances
Confirm Receivables
Forms of Confirmation
Positive Confirmation
Negative Confirmation
Timing and Extent of Requests
Controlling the Requests

29. Designing Substantive Tests
Tests of Details of Balances
Disposition of Exceptions
Alternative Procedures for Dealing with Nonresponses
Summarizing and Evaluating Results
Applicability to Assertions

30. Designing Substantive Tests
Tests of Details of Accounting Estimates
Allowance for Doubtful Accounts
Aged Trial Balance
Tests of Details of Disclosures

31. Study Break
This type of confirmation requires a debtor to respond only when the amount shown is incorrect.
Positive Confirmation
Negative Confirmation
Avoidance
Existence
B. Negative Confirmation

32. Study Break
This cutoff test is designed to obtain reasonable assurance that cash receipts are recorded in the accounting period in which received.
Sales cutoff test
Sales return cutoff test
Vouching revenue transactions
Cash receipts cutoff test
D. Cash receipts cutoff test