CHAPTER 11
SUBTANTIVE
AUDIT TESTING:
Revenue Cycle
1
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
2
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
3
As discussed
in chapter 9
Understand internal
control as it relates
to sales
How does an
auditor design
tests of controls
and substantive
tests of
transactions for
sales?
4
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
5
In assessing control
risk, the auditor should
consider:
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:
- adequate separation
of duties
- proper authorization
- adequate documents
and records
- use of prenumbered
documents
- mailing of monthly
statements
- internal verification
procedures
Understand internal
control as it relates
to sales
Assess the planned
control risk related
to sales
7
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
8
Understand internal
control as it relates
to sales
Will substantive
tests be reduced
sufficiently to
justify the cost of
performing tests
of controls?
Assess the planned
control risk related
to sales
Evaluate
cost-benefit
of testing
controls
9
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
10
In designing substantive tests of
transactions for
sales, the auditor
should consider:
Do recorded
sales actually
exist?
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
In designing substantive tests of
transactions for
sales, the auditor
should consider:
Are all
existing sales
transactions
recorded?
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
12
In designing substantive tests of
transactions for
sales, the auditor
should consider:
Are sales
accurately
recorded?
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
13
In designing substantive tests of
transactions for
sales, the auditor
should consider:
Are recorded
sales properly
classified?
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
14
In designing substantive tests of
transactions for
sales, the auditor
should consider:
Are sales
recorded on
the correct
dates?
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
15
In designing substantive tests of
transactions for
sales, the auditor
should consider:
Are sales
transactions
properly included
in the master file
and correctly
summarized?
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
16
The auditor should also perform
procedures to detect fraud
related to cash receipts:
Determine whether
cash received was
recorded.
17
The auditor should also perform
procedures to detect fraud
related to cash receipts:
Prepare a proof
of cash receipts.
18
The auditor should also perform
procedures to detect fraud
related to cash receipts:
A proof of
cash receipts
reconciles cash
receipts recorded in the cash
receipts journal
with actual bank
deposits.
19
The auditor should also perform
procedures to detect fraud
related to cash receipts:
Test to discover
lapping of accounts
receivable.
20
Lapping is a fraud
scheme that occurs
because of inadequate
segregation of duties
related to mail, cash
receipts, and
accounting.
21
a lapping example
A/R
Able $1000
A/R
Baker $1000
A/R
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.
22
a lapping example
A/R
Able $1000
-1000
0
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.
23
a lapping example
A/R
Able $1000
-1000
0
A/R
Baker $1000
-1000
0
A/R
Cain $1000
On Wednesday, a check is received from
Cain Co. in payment of their a/r. The payment, however, is credited to Baker’s
account.
24
What audit procedures
may detect lapping?
- a/r confirmations (disputed balances,
disputed timing of payments)
client
32
client’s a/r customer
25
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)
26
Other than adequate segregation of
duties, what client internal control
may prevent or detect lapping?
required
vacations
(and rotation of
duties during
vacations)
27
Confirmation Sequence
obtain
a/r aging
select
specific
a/r for
confirmation
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
28
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.
29
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
30