As part of a financial audit, the auditor must assess the inherent risk associated with the revenue cycle and perform tests to determine it is relatively free of error or fraud. The inherent risk for this cycle is related to the cutoff dates for particular types of sales and the pressures from management to misstate revenues. By conducting so-called substantive tests and tests of controls, the auditor can provide some assurance that the revenues of the company are recorded accurately. Show The Revenue and Receipts CycleRevenue recognition issues usually stem from consignment sales, round-trip sales, refund and return rights, gross sales and bill and hold transactions. Sometimes management feels pressure to misstate revenues to encourage investors or impress upper-level management or the board of directors. Other times it is simply a case of human error and recording the revenue at the wrong time, reports CPA Charles Hall. Before performing the audit, the auditor should develop an understanding of both the entity and industry in which the organization operates so he can better assess the outcome of the auditing procedures. Analytical ProceduresAnalytical procedures often include running various financial ratios and comparing them to industry benchmarks. For the revenue cycle, the auditor examines the gross profit margin and the amount of growth that the company has experienced in one year. As part of the revenue cycle audit checklist, he should analyze the organization's maximum capacity for sales if its facility and employees were fully utilized. He must also examine the accounts receivable account to ensure it is not outgrowing sales. If it is, this could indicate that the company is a credit risk and may have cash flow problems in the future. Tests of ControlsThe main component for the internal controls of an organization, no matter which cycle they are pertinent to, is management's adoption and adherence to high ethical standards and strong controls. According to professional services firm Kaufman Rossin, tests of controls for the revenue cycle include:
Substantive TestsOther audit procedures for the revenue cycle journal include the performance of substantive tests. This will help to find any errors or misstatements within the accounts or documentation associated with the revenue cycle. These tests include checking the trial balance that the accountant creates at the end of the cycle, confirming receivable amounts with the company or person who owes money and evaluating the accuracy of the allowance for uncollectible accounts by reviewing the history of the entity. They also include vouching, tracing and performing cutoff tests for all sales, sales returns and cash receipts. To do this, the auditor examines all documentation related to a customer and also examines a journal entry; she then either works forward from the initial sales order to the journal entry or backward from journal entry to initial sales order to determine accuracy. Exam 3 Practice QuestionsChapter 91.The revenue cycle considered by auditors includes the sales process but not collections. Get answer to your question and much more 2.The revenue cycle involves the procedures in generating a sales order, shipping the products,recording the transaction, and collecting the receivable. Get answer to your question and much more 3.The shipping department confirms the shipment of goods by completing the packing slip andreturning it to the purchasing department. Get answer to your question and much more 4.Substantive tests of details for revenue transactions focus primarily on the completeness assertion. Get answer to your question and much more 5.As required by auditing standards, auditors should ordinarily presume there is a risk of materialmisstatement caused by fraud relating to revenue recognition. Get answer to your question and much more 6.A company that ships a large quantity of its products from its manufacturing plant to a warehouse thatit leases until the customer is ready for the product should record the delivery to the warehouse asrevenue. Get answer to your question and much more 7.The intentional loading of sales at the end of a period to customers that do not need the goods at thattime should not be recorded as revenues. Get answer to your question and much more 8.A tendency for fraud may exist when the granting of stock options is dependent on reaching anearnings goal. Get answer to your question and much more 9.A consistent pattern of earnings growth would eliminate the auditor’s concern for fraud in revenuerecognition. Get answer to your question and much more 10.Ratio analysis performed by the audit team may include the comparison of gross profit percentage toindustry averages. Get answer to your question and much more 11.Use of reasonableness tests by Bono Mullins, PC, will include relationships between financial but notnon-financial data. Get answer to your question and much more 12.Current auditing standards do not require the confirmation of receivables if accounts receivable arenot material. Get answer to your question and much more 13.Accounts receivable confirmation letters should be prepared on the auditing firm's letterhead. Get answer to your question and much more 14.Lapping of accounts receivable is least likely to occur when there is an inadequate segregation ofduties. Get answer to your question and much more 15.Positive accounts receivable confirmations should be used on all accounts which represent smallimmaterial balances. Get answer to your question and much more 16.When the client has a large number of relatively small accounts receivable and the assessed level ofcontrol risk for receivables and related revenue transactions is high, the auditor is more likely to usenegative confirmations. Get answer to your question and much more What is revenue cycle in audit?A revenue cycle audit should look at your billing from start to finish – from scheduling to insurance verifications, to coding and charge entry, payment posting and all standard follow-up.
Which of the following is not included in the revenue cycle?Which account is generally NOT considered a part of the revenue cycle? The inventory account is not typically viewed as part of the revenue cycle.
What is revenue and collection cycle?The revenue and collection cycle in a company is a repeating set of business activities and processing operations associated with providing goods and services to customers and the collection of payments for those sales. An efficient revenue and collection cycle is essential to ensure steady cash flow for a company.
What is revenue cycles quizlet?Revenue Cycle. recurring set of business activities and related information processing operations associated with providing goods and services to customers and collecting cash in payment for those sales.
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The revenue cycle considered by auditors includes the sales process but not collections
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