Topic 8 audit of revenue & receipts cycle + acc receivable
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Topic 8 audit of revenue & receipts cycle + acc receivable
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Topic 8 audit of revenue & receipts cycle + acc receivable
- 1. TOPIC 8: AUDIT OF REVENUE AND RECEIPTS CYCLE + ACCOUNT RECEIVABLES References: Chapter 14 & 16 AUD390 2014 AUDITING AND ASSURANCE SERVICES IN MALAYSIA
- 2. LEARNING OUTCOMES AUD390 2014 OVERVIEW OF THE ACCOUNTS & CLASSES OF TRANSACTIONS BUSINESS FUNCTIONS & DOCUMENTS FINANCIAL REPORT ASSERTIONS MAJOR INTERNAL CONTROL AND RELATED AUDIT PROCEDURES SUBSTANTIVE TESTS FOR ACCOUNTS RECEIVABLE
- 3. OVERVIEW OF REVENUE & RECEIPTS CYCLE AUD390 2014 Accounts in the Cycle Classes of Transactions Business functions Documents & records
- 4. Accounts In The Cycle AUD390 2014 Cash Sales: Cash/Bank Acc vs. Sales Acc Credit Sales: Acc Receivable vs. Sales Acc Sales Return & Allowance: Sales Return Acc vs. Acc receivable vs. Cash/Bank Acc Charge of for bad debts: Bad Debt Expense Acc vs. Acc Receivable
- 5. Classes of Transactions AUD390 2014 1. Sales (cash and sales on account) 2. Cash receipts 3. Sales returns & allowances 4. Charge-off of uncollectible accounts 5. Estimate of bad debt expense
- 6. AUD390 2014 CLASSES OF TRANSACTION S ACCOUNTS BUSINESS FUNCTIONS DOCUMENTS & RECORDS 1.Sales Sales Acc Receivable i. Processing customer order ii. Granting credit iii. Shipping goods iv. Billing customers & recording sales Customer order Sales order Customer order or sales order Shipping document Sales invoice Sales transaction file Sales journal or listing Account receivable master file Accounts receivable trial balance
- 7. AUD390 2014 CLASSES OF TRANSACTIONS ACCOUNTS BUSINESS FUNCTIONS DOCUMENTS & RECORDS 2. Cash Receipts Bank Account Receivable v. Processing & recording cash receipts Remittance advice Prelisting of cash receipts Cash receipts transaction file Cash receipts journal or listing 3. Sales returns & Allowances Sales Returns & Allowances Account Receivable vi. Processing & recording sales returns & allowances Credit memo Sales returns & allowances journal 4. Charge-off of uncollectible accounts Account Receivable Allowance for uncollectible accounts vii. Charging off uncollectible accounts receivable Uncollectible account authorization form General journal 5. Bad Debt Expense Bad debt expense Allowance for viii. Providing for bad debts General journal
- 8. KEY CONTROL ACTIVITIES AUD390 2014 1. Adequate separation of duties 2. Proper authorization 3. Adequate documents & records 4. Prenumbered documents 5. Monthly statements 6. Internal verification procedures
- 9. Adequate Separation Of Duties AUD390 2014 Important to prevent various types of intentional & unintentional type of misstatements General example guidelines: Anyone responsible for inputting sales and cash receipts transaction information into the computer being denied to access to cash To separate credit-granting function from the sales function because credit checks are intended to influence sales personnel to optimize volume of sales even at the expense of high bad debt written off
- 10. Proper Authorization AUD390 2014 Authorization at three key points 1. Credit must be properly authorized before a sale take places 2. Goods should be shipped only after proper authorization 3. Price, including basic terms, freight, & discount must be authorized To prevent the loss of company assets by shipping to fictitious customers or those who fail to pay for the goods To ensure that the sale is billed at the price set by company policy
- 11. Adequate Documents & Records AUD390 2014 General example guidelines: Prepare a multicopy prenumbered sales invoice at the time a customer order is received. Copies are used for different purpose: Approve credit Authorize shipment Record the number of unit shipped Billed customers
- 12. Pre-numbered Documents AUD390 2014 Use of prenumbering, to prevent: the failure to bill or record sales The occurrence of duplicate billings and recordings E.g. A billing clerk filed a copy of all shipping documents in sequential order after each shipment is billed To program the computer to prepare a listing of unused numbers at month’s end with follow-up by appropriate personnel
- 13. Monthly Statements AUD390 2014 It is sending monthly to customer either generated by computer or by someone who has no direct relationship in handling cash or preparing sales & account receivables It encourage a response from customers if the balance is improperly stated
- 14. Internal Verification Procedures AUD390 2014 Use of computer programs or independent persons for checking the processing and recording of sales transactions E.g. Accounting for the numerical sequence of prenumbered documents Checking the accuracy of document preparation Receiving reports for unusual or incorrect items
- 15. AUDIT OF ACCOUNT RECEIVABLES AUD390 2014 Using Tests of Details of Balance 1. Recorded Acc Receivables exist 2. Existing Acc Receivables are included 3. Acc Receivables are accurate 4. Acc Receivables are properly classified 5. Cutoff for Acc Receivables is correct 6. Acc Receivables is stated at realizable value 7. The client has rights to Acc Receivable 8. Acc Receivable presentation & disclosure are proper
- 16. Recorded Account Receivables Exist AUD390 2014 Determine the existence of A.R. amount through confirmation with customers ISA505 External Confirmation provides guideline to auditors in using confirmation letter as a method to obtain audit evidence In using confirmation, auditor must decide Type of confirmation (positive, negative or blank confirmation) Timing of the procedures (when to request the information) Sample size Individual items to select
- 17. Existing Account Receivables Are Included AUD390 2014 By footing the A.R. trial balance & reconciling the balance with the control account in the general ledger
- 18. Account Receivables Are Accurate AUD390 2014 Tests of the debit & credit to individual customers’ balances are done by examining supporting documentation for shipments & cash receipts
- 19. Account Receivables Are Properly Classified AUD390 2014 Review aged trial balance to ensure A.R. is properly classifies under current assets
- 20. Cutoff For Account Receivables Is Correct AUD390 2014 To verify whether transactions near the end of accounting period are recorded in the proper period Example: checking the intentional or unintentional inclusion of several large and subsequent period sales in the current period
- 21. Account Receivables Is Stated At Realizable Value AUD390 2014 To evaluate the account allowance for uncollectible accounts
- 22. The Client Has Rights To Account Receivable AUD390 2014 Not the issue since A.R. usually belong to the customer Audit procedures involved: Review of minutes Discussion with the client Confirmation with bank Examination of debts contract for evidence of AR pledged as collateral
- 23. Account Receivable Presentation & Disclosure Are Proper AUD390 2014 According to generally accepted accounting principles & presentation and disclosure requirements