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Auditing Revenue Process: Type of Transaction Account Affected

The document discusses auditing the revenue process. It provides the SEC's four criteria for revenue recognition per SAB No. 101 which are that there must be persuasive evidence of an arrangement, delivery must occur, the price must be fixed or determinable, and collectibility must be reasonably assured. It also lists types of revenue transactions and their effect on accounts. Finally, it discusses four inherent risk factors that may affect the revenue process: industry factors, complex revenue recognition issues, difficulty auditing transactions, and misstatements detected in prior audits.

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Kirena Xaviery
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70 views6 pages

Auditing Revenue Process: Type of Transaction Account Affected

The document discusses auditing the revenue process. It provides the SEC's four criteria for revenue recognition per SAB No. 101 which are that there must be persuasive evidence of an arrangement, delivery must occur, the price must be fixed or determinable, and collectibility must be reasonably assured. It also lists types of revenue transactions and their effect on accounts. Finally, it discusses four inherent risk factors that may affect the revenue process: industry factors, complex revenue recognition issues, difficulty auditing transactions, and misstatements detected in prior audits.

Uploaded by

Kirena Xaviery
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Auditing Revenue process

The SEC in SAB No. 101 provides the following criteria for revenue recognition:

• Persuasive evidence of an arrangement exists.

• Delivery has occurred or services have been rendered.

• The seller’s price to the buyer is fixed or determinable.

• Collectibility is reasonably assured.

Type of Transaction Account Affected

Sales transactions Trade accounts receivable

Sales

Allowance for uncollectible accounts

Bad-debt expense

Cash receipts transactions Cash

Trade accounts receivable

Cash discounts

Sales return and allowance Sales returns

transactions Sales allowances

Trade accounts receivable

segregation of Duties Possible Errors or Fraud Resulting from


Conflicts of Duties
The credit function should be segregated If one individual has the ability to grant
from the billing function. credit to a customer and also has
responsibility for billing that customer, it is
possible for sales to be made to customers
who are not creditworthy. This can result in
bad debts
The shipping function should be segregated If one individual who is responsible for
from the billing function. shipping goods is also involved in the billing
function, it is possible for unauthorized
shipments to be made and for the usual
billing procedures to be circumvented. This
can result in unrecorded sales transactions
and theft of good
The accounts receivable function should be If one individual is responsible for the
segregated from the general ledger accounts receivable records and also for the
general ledger, it is possible for that
individual to conceal unauthorized
shipments. This can result in unrecorded
function. sales transactions and theft of goods
The cash receipts function should be If one individual has access to both the cash
segregated from the accounts receivable receipts and the accounts receivable records,
it is possible for cash to be diverted and the
shortage of cash in the accounting records to
be covered. function. This can result in theft
of the entity’s cash.

- Four specific inherent risk ( Inherent risk is the risk that is inherent in the
organization prior to action attempts to change the likelihood and impact of the risk
(risiko bawaan) ) factors that may affect the revenue process are the following:
1. Industry-related factors. Factors such as the profitability and health of the
industry in which an entity operates, the level of competition within the industry,
and the industry’s rate of technological change.
2. The complexity and contentiousness of revenue recognition issues. include
recognition of revenue on long-term construction contracts, long-term service
contracts, lease contracts, and installment sales. There may be disputes between
the auditor and management over when revenue,
3. The difficulty of auditing transactions and account balances. to the issues
related to revenue recognition discussed previously,the allowance for
uncollectible accounts can be difficult to audit because of the subjectivity
involved in determining its proper value
4. Misstatements detected in prior audits. the presence of misstatements in
previous audits is a good indicator that misstatements are likely to be present
during the current audit. With a continuing engagement, the auditor
Definiton some keyword

Analytical procedures. Evaluations of financial information made by a study of plausible


relationships among both financial and nonfinancial data.

Application controls. Controls that apply to the processing of specific computer applications
and are part of the computer programs used in the accounting system.

Assertions. Expressed or implied representations by management that are reflected in the


financial statement components.

Confirmation. The process of obtaining and evaluating direct communication from a third
party in response to a request for information about a particular item affecting financial
statement assertions.

General controls. Controls that relate to the overall information processing environment and
have a pervasive effect on the entity’s computer operations.

Lapping. The process of covering a cash shortage by applying cash from one customer’s
accounts receivable against another customer’s accounts receivable.

Negative confirmation. A confirmation request to which the recipient responds only if the
amount or information stated is incorrect.

Positive confirmation. A confirmation request to which the recipient responds whether or


not he or she agrees with the amount or information stated.

Reliance strategy. The auditor’s decision to rely on the entity’s controls, test those controls,
and reduce the direct tests of the financial statement accounts.

Substantive tests of transactions. Tests to detect errors or fraud in individual transactions.

Tests of controls. Audit procedures performed to test the operating effectiveness of controls
in preventing or detecting material misstatements at the relevant assertion level.

Tests of details of account balances and disclosures. Tests that concentrate on the details of
amounts contained in an account balance and in disclosures.

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