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Final

ACC 521 Study Guide - Final Guide: Audit Risk, Trial Balance, Contingent Liability


Department
Accounting
Course Code
ACC 521
Professor
Kathryn Bewley
Study Guide
Final

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Chapter 11: Audit Applications: Revenues, Receivables, & Receipts Process
Revenues, Receivables, & Receipts Process
- Understanding the Revenue, Receivables and Receipts Process
The auditor must understand the business’s method of generating revenues and use of them in
operations in order to assess the business risk and risk of misstatement.
- Risk Assessment for Revenues, Receivables and Receipts
The auditor considers risks in revenue and cash receipt transactions and accounts receivable
balances.
Assess risks in management’s assertions regarding existence, ownership, completeness,
valuation and disclosure
- Typical Activities
Start here → customer orders → credit granting → warehousing, shipping and delivery → bill
customers → collections
Revenue, receivables and receipt process activities include:
oReceiving and processing customer orders.
oDelivering goods and services to customers.
oBilling customers and accounting for receivables.
oCollecting and depositing cash.
oReconciling bank accounts.
- Control Considerations in the Revenue, Receivables and Receipts Process
Identify client’s controls over Sales Revenues, Receivables, and Cash Receipts and Cash
Balances
Consider the client’s policies, procedures and methods of :
oAuthorization
oCustody
oRecord keeping
oReconciliation
Authorization

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- When a customer order is received, a number of authorizations are required.
Customer status, credit status and availability of inventory need to be verified before a sales
order can be created.
The proper price for the sale also needs to be determined.
Once approved, an open sales order and a packing slip are created, and inventory may be
updated for the commitment of goods.
Custody
- Physical custody of inventory starts with the stockroom or warehouse where inventory is kept.
Custody is transferred to the shipping department on the authorization of the packing slips.
If stock keepers or shippers have the ability to change quantities shown on packing slips, a
weakness in separation of duties is created.
- Custody of accounts receivable implies the power to alter those records.
Receivable balances can be altered directly, or by entering transactions such as returns,
allowances or write-offs.
Personnel with this power may have a combination of incompatible responsibilities.
Recording
- When the shipment is complete, several documents are created:
a bill of lading as evidence of the actual delivery of goods,
a sales invoice that bills the customer for the goods, and
the open sales order is closed.
Personnel with the ability to enter, alter, or physically intercept the sales invoice may have a
combination of incompatible responsibilities.
Periodic Reconciliation
- A comparison of the total unpaid balances to the accounts receivable control account is a common
reconciliation.
This should be performed by personnel who have no responsibility over authorization, custody
or recording of transactions.
An aged trial balance is usually used for this reconciliation.
Cash Receipts and Cash Balances
- Cash can be received in many ways, over the counter, mail, lockbox, or electronic funds transfer.
- Authorization is required for approving discounts, returns and allowances.
Receiving cash and approving discounts or allowances are incompatible functions
Custody
- In cash-based business, at some point, someone has the cash and cheques in hand -> physical
custody.
A number of controls should be considered, including rotation of staff, technological controls and
insurance
Recording
- The accountants who record cash, should not also handle cash.
Cash should be recorded using the remittance lists.
The cash account, accounts receivable control account, and the accounts receivable subsidiary
accounts are all updated.
Periodic Reconciliation
- Bank reconciliations need to be prepared carefully.
Deposit slips should be traced to the cash remittance lists, paid cheques should be compared to
the disbursements journal.
The reconciliation should be performed by personnel who do not have responsibility for
recording cash receipts or disbursements.
Audit Evidence in Management Reports and Data Files
- Audit evidence will be found in a number of reports created by management:
Pending order master file (completeness).
Credit check files (up-to-date maintenance).

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Price list master file (must be correct for billing).
Sales detail (sales journal) file (compare to shipments and dates).
Sales analysis reports (by product line, by employee and investigate unusual items).
Accounts receivable aged trial balance (assessing bad debts and accounting for balances).
Cash receipts journal (deposits, receipts, adjusting entries re: bank).
Control Risk Assessment
- Control risk assessment governs the nature, extent, and timing of substantive audit procedures applied
in the audit of account balances.
- Account balances affected by the revenue, receivable and receipts process include:
cash in bank
cash receipts
accounts receivable
allowance for doubtful accounts
bad debt expense
sales revenue
sales returns allowances & discounts
perpetual inventory records and shipping records
- General Control Considerations:
Ensure proper segregation of responsibilities.
Consider bonding of key employees.
Control structure should provide for detailed checking of business rules and/or policies.
Control information is collected through an internal control questionnaire or by conducting a
walk-through.
Test of Controls
- Tests of controls should address all of
the control objectives.
Cut-off is important to revenue
cycle.
Tests include identification of
population and expression of
the action to be taken.
oNote dual direction of
testing for
completeness and
validity requires
selection of sample
from appropriate
population.
Control Risk Assessment (Exhibit 11-5)
- The purpose of testing controls is to
determine nature, extent, and timing
of substantive procedures.
Good controls – low control
risk:
oSmaller sample sizes,
earlier timing for
substantive tests.
Poor controls – high control
risk:
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