1. CHAPTER 11 SUBTANTIVE AUDIT TESTING: Revenue Cycle

2. - sales returns and allowances - bad debt expense
What accounts are typically involved in the sales and collection cycle?
- sales
- sales returns and allowances
- bad debt expense
- cash discounts taken
- trade accounts receivable
- allowance for uncollectible
accounts
- cash in the bank

3. What classes of transactions occur in the sales and collection cycle?
- sales (cash and credit)
- cash receipts
- sales returns and allowances
- charge-off of uncollectible
accounts
- bad debt expense

4. Understand internal
control as it relates
to sales
As discussed
in chapter 9
How does an auditor design tests of controls and substantive tests of transactions for sales?

5. How does an auditor design tests of controls and substantive tests of transactions for sales?
Understand internal
control as it relates
to sales
Assess the planned
control risk related
to sales

6. In assessing control risk, the auditor should consider:
Understand internal
control as it relates
to sales
In assessing control risk, the auditor should consider:
Assess the planned
control risk related
to sales ?

7. In assessing control risk, the auditor should consider:
Understand internal
control as it relates
to sales
- adequate separation
of duties
- proper authorization
- adequate documents
and records
- use of prenumbered
documents
- mailing of monthly
statements
- internal verification
procedures
Assess the planned
control risk related
to sales

8. How does an auditor design tests of controls and substantive tests of transactions for sales?
Understand internal
control as it relates
to sales
Assess the planned
control risk related
to sales
Evaluate
cost-benefit
of testing
controls

9. Will substantive tests be reduced sufficiently to justify the cost of
Understand internal
control as it relates
to sales
Assess the planned
control risk related
to sales
Will substantive
tests be reduced
sufficiently to
justify the cost of
performing tests
of controls?
Evaluate
cost-benefit
of testing
controls

10. How does an auditor design tests of controls and substantive tests of transactions for sales?
Understand internal
control as it relates
to sales
Assess the planned
control risk related
to sales
Evaluate
cost-benefit
of testing
controls
Design tests of controls and substantive tests of transactions for sales

11. Do recorded sales actually exist?
Understand internal
control as it relates
to sales
In designing sub- stantive tests of transactions for sales, the auditor should consider:
Assess the planned
control risk related
to sales
Evaluate
cost-benefit
of testing
controls
Do recorded
sales actually
exist?
Design tests of controls and substantive tests of transactions for sales

12. Are all existing sales transactions recorded?
Understand internal
control as it relates
to sales
In designing sub- stantive tests of transactions for sales, the auditor should consider:
Assess the planned
control risk related
to sales
Evaluate
cost-benefit
of testing
controls
Are all
existing sales
transactions
recorded?
Design tests of controls and substantive tests of transactions for sales

13. Are sales accurately recorded?
Understand internal
control as it relates
to sales
In designing sub- stantive tests of transactions for sales, the auditor should consider:
Assess the planned
control risk related
to sales
Evaluate
cost-benefit
of testing
controls
Are sales
accurately
recorded?
Design tests of controls and substantive tests of transactions for sales

14. Are recorded sales properly classified?
Understand internal
control as it relates
to sales
In designing sub- stantive tests of transactions for sales, the auditor should consider:
Assess the planned
control risk related
to sales
Evaluate
cost-benefit
of testing
controls
Are recorded
sales properly
classified?
Design tests of controls and substantive tests of transactions for sales

15. Are sales recorded on the correct dates?
Understand internal
control as it relates
to sales
In designing sub- stantive tests of transactions for sales, the auditor should consider:
Assess the planned
control risk related
to sales
Evaluate
cost-benefit
of testing
controls
Are sales
recorded on
the correct
dates?
Design tests of controls and substantive tests of transactions for sales

16. Understand internal
control as it relates
to sales
In designing sub- stantive tests of transactions for sales, the auditor should consider:
Assess the planned
control risk related
to sales
Evaluate
cost-benefit
of testing
controls
Are sales
transactions
properly included
in the master file
and correctly
summarized?
Design tests of controls and substantive tests of transactions for sales

17. The auditor should also perform procedures to detect fraud related to cash receipts:
Determine whether
cash received was
recorded.

18. ? Prepare a proof of cash receipts.
The auditor should also perform procedures to detect fraud related to cash receipts:
Prepare a proof
of cash receipts. ?

19. The auditor should also perform procedures to detect fraud related to cash receipts:
A proof of
cash receipts
reconciles cash
receipts record-
ed in the cash
receipts journal
with actual bank
deposits.

20. The auditor should also perform procedures to detect fraud related to cash receipts:
Test to discover
lapping of accounts
receivable. ?

21. Lapping is a fraud
scheme that occurs
because of inadequate
segregation of duties
related to mail, cash
receipts, and
accounting.

22. a lapping example On Monday, a check is received from
A/R
Able $1000
Baker $1000
Cain $1000
On Monday, a check is received from
Able Co. in payment of their a/r. The
check is stolen by the bookkeeper! No
entry is made and all evidence of the
payment receipt is destroyed.

23. a lapping example On Tuesday, a check is received from
A/R
Able $1000
-1000
A/R
Baker $1000
A/R
Cain $1000
On Tuesday, a check is received from
Baker Co. in payment of their a/r. The
payment, however, is credited to Able’s
account.

24. a lapping example On Wednesday, a check is received from
A/R
Able $1000
-1000
A/R
Baker $1000
A/R
Cain $1000
-1000
On Wednesday, a check is received from
Cain Co. in payment of their a/r. The pay-
ment, however, is credited to Baker’s
account.

25. What audit procedures may detect lapping?
- a/r confirmations (disputed balances,
disputed timing of payments)
client 32
client’s a/r customer

26. What audit procedures may detect lapping?
- a/r confirmations (disputed balances,
disputed timing of payments)
- comparison of deposit slips to cash
receipts journal (different amounts,
different timing)

27. Other than adequate segregation of duties, what client internal control may prevent or detect lapping?
required
vacations
(and rotation of
duties during
vacations)

28. Confirmation Sequence
obtain
a/r aging
select
specific
a/r for
confirma-
tion
print
confirmations
and mail
them
analyze
results,
investigate
disputed
amounts
statistically and/or
judgmentally determine whether the
extent of exceptions will affect internal
control evaluation and acceptability
of a/r balance

29. Receivables Audit Procedures
- perform analytical procedures on
receivables and related accounts
- review year-end cutoff for sales.
Examine all sales invoices and related
shipping documents and cash receipts
for several days before and after the
balance sheet date.
Determine when title
to the goods passed.

30. Receivables Audit Procedures
- perform analytical procedures on
receivables and related accounts
- review year-end cutoff for sales.
- after reviewing a/r aging, discuss
possible a/r write-offs and the adequacy
of the allowance with management
- inspect notes receivable
- vouch a sample of a/r to customer
order, sales order, sales invoice,
shipping documents, cash receipts