Ch. 10 Important concepts

Page 1

Important Assertions:

Transactions:

Occurrence

Accuracy

Classification

Cutoff

Balance Sheet:

Existence

Valuation & Allocation

Revenue Transactions:

1. Sale of good/service for cash/credit

2. Receipt of cash for payment

3. Returning of goods for credit/cash

Important Documents:

Sales Order

Credit Approval Form

Open-Order Report

Shipping Docs

Sales Invoice

Sales Journal

Customer Statement

A/R Subsidiary Ledger

Aged Trial Balance (A/R)

Remittance Advice

Cash Receipt Journal

Credit Memo (returned goods)

Write-Off Authorization

Important Functions

Order Entry

Credit Authorization

Shipping

Billing

Cash Receipts

Accounts Receivable

General Ledger

Segregation of Duties

Credit: Billing

A/R: GL

Shipping: Billing

Cash Receipts: A/R

Write off: Cash Receipts

Revenue Recognition According to GAAP

AC 606 Revenue from Contracts with Customers (Requires a contract)

Steps

1. identify contract

2. identify obligations

3. identify transaction price

4. allocate price to performance obligations

5. recognize revenue when performance is satisfied

Fraud Risks:

1, Side Agreements

2. Channel Stuffing

3. Related-Party Transactions

4. Bill and Hold sales

Control Risk Tests

1. Inquiries (cannot be the only one done)

2. Inspection of docs and records

3. Observe the operations of control

4. Walkthroughs

5. Reperformance

Inherent Risks

1. Industry Related Risks

2. Complex revenue recognition issues

3. Difficulty of auditing transactions and account balances

4. Misstatements detected in Prior Audits

Tests for Revenue Transactions

Occurrence - Segregation of duties (Fictitious Revenue)

- trace sales invoices to customer order and shipping doc (rev. recorded, goods not shipped)

Completeness - match shipping docs to sales invoice

Authorization - review procedure for approving credit, trace shipping docs,

Accuracy - verify math on sales invoice, recompute(Correct $ amount) Reconcile ales journal to subsidiary ledger (posted to correct sale journal and customer acct.)

Cutoff - compare date on sales invoice with shipping docs and when recorded in the sales journal

Classification - review sales journal and general ledger