TOPICS
 Nature of revenue/receipt cycle
 Flow of information
 Auditor’s assessment of control risk
 Audit of internal2 control for sales, cash
receipts
 Computer auditing, sampling, tests of
controls
 Assurance, consulting services
2
NATURE OF REVENUE/RECEIPT CYCLE
 Goods, services sold to customers in exchange for
future promises to pay
 Cash collected from customers
3
Sales Order
1
Credit / Customer
Service
2
REVENUE CYCLE
(SUBSYSTEM)
Cash Receipts/
Collections
6
Shipping
3
Billing/ Accounts
Receivable
4/5
DFD of Sales Order Process
REVENUE/RECEIPT CYCLE
Flow of Information
 Customer order received
 Sales order prepared
 Price, quantity, goods, terms
 Shipping document
 Identifies goods shipped
 Contract between seller, carrier
 Sales invoice (bill)
 Customer remittance advice
 Returned with payment from customer
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SELLER’S DOCUMENTS
 Sales order
 Identifies goods ordered, price, quantity,
terms, etc.
 Shipping document (bill of lading)
 Identifies good shipped
 Contract between seller & carrier
 Sales invoice
 Formal notice to customer of amount &
payment terms
 Customer remittance advice
 Returned with payment
7
CONTROLS FOR CREDIT SALES
 Multicopy, prenumbered sales order prepared
 Customer credit reviewed, approved
 Authorized copy sales order accompanies goods
from Inventory Control to Shipping
 Goods received in Shipping compared with sales
order; shipping document prepared
 Common carrier provides receipt for goods shipped
 Shipping document, approved sales order sent to
billing for preparation of invoice, daily sales
summaries
 Invoice copy sent to General Accounting for
recording
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CASH COLLECTION
 Process
 Checks by mail listed, endorsed
 List copy to Accounts Receivable with remittance for
posting
 List copy with checks to Cash Receipts Dept. for daily
deposit
 Sales returns separate from cash collection
 Uncollected accounts
 Reviewed for credit limits, aged, written off as necessary
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INTERNAL CONTROL & RISK
Controls
Risks
Authorization
Credit risk, uncollectible
accounts
Shipment, billing not timely
Prenumbered
shipping documents
Recording controls Items recorded in improper
amounts, accounts
Theft
Restricted access
10
ASSESSING CONTROL RISK
Obtain Understanding
 Document the client’s system
 Flowchart, questionnaire, narrative
 Perform transaction walk-through
 Identify control activities
 Test controls to reduce control risk below
maximum
 Assess control risk
11
TESTS OF CONTROLS
Sales, Collection
 Provide a reasonable degree assurance that
employees comply with management’s procedures
 Sales
 Properly authorized, executed, recorded
 Cash collections
 Cash receipts recorded, deposited promptly
 Returns, uncollectible accounts
 Proper authorization, recording
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CONTROL RISK
Shipping
 Major risks
 Unauthorized shipment

Fictitious or related parties
 Goods properly shipped, not billed, recorded
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TESTING CONTROLS: Shipping
 Select random sample shipping documents
 Examine sample for authorized sales order & agreement
 Trace sample shipping documents to invoices
(completeness)
 Trace invoices to sales journal, A/R ledgers
 Trace invoices to inventory records
14
CONTROL RISK
Billing
 Major risks
 Bills sent but goods not shipped
 Bills not properly prepared, recorded
15
TESTING CONTROLS: Billing
 Select sample invoices from Billing
dept.
 Verify unit prices & mathematical
accuracy
 Trace invoices to shipping
documents (existence/occurrence)
 Trace invoices to sales journal, A/R
ledgers
 Trace invoices to inventory records
16
CONTROL RISK
Recording
 Periodic summaries not prepared or not prepared
correctly
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TESTING CONTROLS: Recording
 Review evidence of procedures for
 Reconciliation daily sales summaries with sales journal
totals
 Periodic reconciliation A/R trial balance with general
ledger control
 Scan sales journal for unusual transactions, large
amounts
 Verify mathematical accuracy sales journal for
selected periods; trace postings to general ledger
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CONTROL RISK
Cash Collection, Deposit
 Risk of embezzlement, deposit into improper accounts
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TESTING CONTROLS:
Cash Collection & Deposit
 Cash collection
 Surprise basis: take control bank deposits
 Compare total checks to total deposit slip
 Compare check details to cash receipt records &
A/R ledger
 Determine timeliness
 Deposits
 Interim: compare deposits CRJ with bank
statements
 Trace CRJ to general ledger
20
CONTROL RISK
Sales Returns, Allowances
 Risk that credit memoranda
 Not approved
 Not properly recorded
21
TESTING CONTROLS:
Sales Returns & Allowances
 Test details random sample credit memoranda
 Receiving reports
 Perpetual inventory records
 Entries A/R ledger & general ledger
 Review credit register for unusual items
22
CONTROL RISK
Uncollectible Accounts
 Risk that account write-offs
 Properly authorized
 Properly recorded
23
TESTING CONTROLS:
Uncollectible Accounts
For written-off entries:
 Select sample
 Trace to authorization
 Trace to posting
 Review write-offs for unusual entries
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ASSESSING CONTROL RISK
 2 Questions
 Are controls effective?
 Can controls be relied upon?
 If answer is yes to both
 Assess control risk below maximum
 Assess detection risk above minimum
 Restrict substantive tests of sales, receivables, cash
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PRELIMINARY OPINION ON INTERNAL
CONTROL
 Auditor must form opinion on management’s
assessment of internal control over financial reporting
based on



Reports of internal auditors
Auditor’s tests of controls
Substantive audit tests
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TESTS OF CONTROLS
Deduction Management
 3 Critical questions
 Does Accounts Receivable monitor deductions?
 Does Account Operations approve deduction inquiries
 Does senior management review decisions made by
Accounts Receivable, Account Operations?
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TESTS OF BILLING CONTROLS
An Example
 Randomly select sample sales invoices
 Verify unit prices, clerical accuracy
 Trace details of invoices to shipping documents
 Trace sales invoices to inventory records
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