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AUDIT PROGRAMME REVENUE CYCLE

TEST OF CONTROLS REVENUE TRANSACTIONS

Audit Objective Audit procedure Findings


General
Validity Observe & evaluate proper segregation of duties between: Since it not possible for you to observe anything here, think
(to find out whether about why the segregation of duties is important.
there are fictitious
sales, or incidences (i) shipping function & the order entry & billing functions. Unauthorised shipments to fictitious customers without going
whereby sales is through the billing control procedures unrecorded sales
recorded but goods transactions & theft of goods.
not shipped/services
not performed) (ii) credit & billing functions. Sales can be made to customers who are not creditworthy.

Unauthorised shipments can be concealed unrecorded sales


(iii) Accounts Receivable & GL functions. transactions & theft of goods.

Cash can be diverted & shortage of cash can be covered in the


(iv) cash receipts & Accounts Receivable. accounting records theft.
Test 5 sales invoices and look for the relevant authorised No exceptions noted.
sales order & shipping document (bill of lading). Bill of lading should show references to sales invoice.
Review & test client procedures for accounting for Your lecturer is the client. Ask her what are the client
numerical sequence of sales invoices. procedures in accounting for numerical sequence of sales
invoices.

Lecturers response: Sales invoices are pre-printed with fixed


serial numbers. The serial numbers are controlled by the Sales
Manager and the Finance Manager so that numbers do not
repeat.

Reduces the risk of fraudulent sales invoices or missing sales


invoices that are misused.
Review & test client procedures for mailing & handling Your lecturer is the client. Ask her about this matter.
complaints about monthly customer statements.
Lecturers response: The monthly customer statements are
generated from the Accounts Receivable Subsidiary Ledger and
sent to the customers by the 1st of the following month. If they
complain about a balance, the Accounts Receivable dept
together with the Sales & Billing depts will investigate the
matter.

Reduces the risk of revenue being recorded before goods are


shipped/services performed, as customers are unlikely to
recognise an obligation to pay they will complain.
AUDIT PROGRAMME REVENUE CYCLE

TEST OF CONTROLS REVENUE TRANSACTIONS (Contd.)

Audit Objective Audit procedure Findings


Completeness Review & test clients procedures for accounting for You have already performed this test for sales invoices above.
(to find out whether numerical sequence of shipping documents & sales invoices. Just perform the test for shipping documents.
there are any Trace a sample of shipping documents (e.g. bill of lading) Use the shipping documents & sales invoices that you have on
incidences where to their respective sales invoices & to the sales journal. hand. Trace to sales journal for Feb 2006.
goods are
shipped/services No exceptions noted.
performed but Test a sample of daily reconciliations between sales invoices Trace sales invoices for 5 Feb 2006 to the relevant Daily Sales
revenue not recorded) to daily sales report. Report.

No exceptions noted.
Examine the open-order file for unfilled orders older than 2 Assume that there are no unfilled orders more than 2 months.
months. But think of why this step is important.

To prevent sales from being undertaken up. Sales orders which


are unfilled means that goods have not been shipped out &
sales invoices not issued.
Timeliness Compare the dates on sales invoices with the dates of the Must have a minimum delay.
(to avoid revenue relevant shipping documents.
transactions from No exceptions noted.
being recorded in the Compare the dates on the sales invoices to the dates they Must have a minimum delay.
wrong period) were recorded in the sales journal.
No exceptions noted.
AUDIT PROGRAMME REVENUE CYCLE

TEST OF CONTROLS REVENUE TRANSACTIONS (Contd.)

Audit Objective Audit procedure Findings


Authorisation Review the clients procedures for granting credit to Your lecturer is the client. Ask her about this matter.
(to avoid incidences customers.
where goods are Lecturers response: When sales order is received, the order is
shipped/services passed to the Finance Manager for credit approval. The Finance
performed for a Manager will review the customers credit rating with the
customer who is a bad company. If it is positive, then credit approval will be given.
credit risk; to avoid Examine sales orders for evidence of credit approval. No exceptions noted.
shipments/services Ensure that all shipping documents are accompanied by You have already performed this test above.
performed at authorised sales orders.
unauthorised prices or
on unauthorised
terms)
Authorisation Compare prices/terms on sales invoices to authorised price No exceptions noted.
list & terms of trade.
Valuation
Valuation Examine the sales invoice for evidence that a client No exceptions noted.
(to ensure that sales personnel verified mathematical accuracy (look for the
transaction is recorded initials of the staff who did the verification).
at the correct amount) Recompute the information on a sample of 5 sales invoices. No exceptions noted.
Classification Review the sales journal & general ledger for proper No exceptions noted.
(to ensure that the classification of accounts.
sales transaction is Examine sales invoices for proper classification. No exceptions noted.
properly classified)
Posting & Examine the reconciliation of sales invoices to daily sales You have already performed this above.
summarisation report.
(to ensure correct Examine the reconciliation of entries from sales journal to No exceptions noted.
posting to sales Accounts Receivable subsidiary ledger.
journal or customers Review the reconciliation of Accounts Receivable subsidiary Credit Memo C01231 re: sales return by Steven Spielsberg has
accounts in the ledger to general ledger control account. not been recorded in the general ledger.
Accounts Receivable Review & test client procedures for mailing & handling You have already performed this above.
subsidiary ledger, and complaints related to monthly customer statements.
from sales journal to
the general ledger)
AUDIT PROGRAMME REVENUE CYCLE

TEST OF CONTROLS CASH RECEIPT TRANSACTIONS

Audit objective Audit procedure Findings


Validity Observe & evaluate the proper segregation of duties Since it not possible for you to observe anything here, think
(to avoid incidences between the cash receipts & Accounts Receivables function. about why the segregation of duties is important.
whereby cash receipts
are recorded, but not Otherwise, staff could receive money, pocket it. When next
received or deposited debtor pays up, he records the receipt in the cash account AND
in the bank account) applies that receipt against Customer 1s account (Dr
Cash/Bank; Cr A/cs Receivable). No complaints from the AR
Completeness debtor since receipt is taken up, and the books still balance
(this is called lapping). The staff will shift the difference from
Debtor to Debtor.
Review monthly bank reconciliations to ensure that they For our exercise, use only 1 bank reconciliation, i.e. bank
have been independently reviewed. reconciliation statement for Standard Chartered Bank Malaysia
(Feb 2006) only.

No exceptions noted.
Completeness Ensure that all cheques received are payable in the name of Use cheques received for March 2006 only.
(to ensure that cash the company (crossed Account Payee Only).
receipts are not stolen No exceptions noted. In real life, these cheques would have
or lost before being been already banked-in.
recorded) Examine daily pre-listing of cash receipts. Use the pre-listing for 15 March 2006.

No exceptions noted.
Test the reconciliation of daily cash receipts with posting to For daily cash receipts, you may refer to the pre-listing for 15
Accounts Receivable subsidiary ledger. March 2006. Trace to available Accounts Receivable from the
Accounts Receivable Subsidiary Ledger only.

No exceptions noted.
Inquire of client personnel about the handling of monthly You have already performed this above.
customer statements & the examination of resolution of
complaints.
Timeliness Examine cash receipts to see whether they are deposited Use the daily pre-listing of cash receipts dated 15 March 2006.
(to ensure that cash into the bank daily. For banking in, refer to the relevant bank deposit slip.
receipts are not
recorded in the wrong Noted that cash receipts are deposited into the bank 3 days
period) after receipt (18.3.2006) not very timely.
Authorisation Test a sample of cash receipts transactions for proper cash No discounts were given.
(to ensure that cash discounts.
discounts are properly
given)
AUDIT PROGRAMME REVENUE CYCLE

TEST OF CONTROLS CASH RECEIPT TRANSACTIONS (Contd.)

Audit objective Audit procedure Findings


Valuation Review & test that the daily remittance report is reconciled Use Daily Remittance Report for 18 March 2006.
(to ensure that cash to the control listing of remittance advices.
receipts are recorded No exceptions noted.
at the proper amount) Review monthly bank reconciliations to ensure that they You have already performed this above.
have been independently reviewed.
Classification Trace cash receipts from the cash receipts listing to the Use the daily pre-listing of cash receipts dated 15 March 2006 &
(to ensure that cash cash receipts journal for proper classification. trace to cash receipts journal for March 2006.
receipts are recorded
in the correct account) No exceptions noted.
Review the cash receipts journal for unusual items. No exceptions noted.
Posting & Review & test the daily reconciliation of daily remittance Use Daily Remittance Report for 18 March 2006, trace to cash
5uthorized5d5 report with postings to the cash receipts journal & Accounts receipts journal for March 2006 and the Accounts Receivable
(to ensure that cash Receivable subsidiary ledger. subsidiary ledger that you have already obtained.
receipts are posted to
the right customer No exceptions noted. (Traced only the transaction with Steven
account, and properly Spielberg on AR sub ledger.)
posted to the right Review & test client procedures for mailing & handling You have already performed this above.
general ledger complaints related to monthly customer statements.
accounts) Review the posting from the cash receipts journal to the No exceptions noted.
general ledger.
Examine the reconciliation of Accounts Receivable You have already performed this above.
subsidiary ledger to the general ledger.
AUDIT PROGRAMME REVENUE CYCLE

TEST OF CONTROLS SALES RETURNS & ALLOWANCES TRANSACTIONS

Audit objective Audit procedure Findings


Validity Ensure that the credit memorandum (for returned goods or Ask for the credit memoranda for returned goods.
discounts allowed or bad debts written off) is approved by a
person other than the personnel who initiated it. No exceptions noted for approval of credit memo wrt Steven
Ensure that a credit memorandum for returned goods is Spielbergs return.
supported by a receiving document indicating that goods
have been returned. However, no receiving document attached to the credit memo
for returned goods by Angelina Jolie. Also note that the credit
memo is not 6uthorized.

Goods Returns Clerk colludes with the Cash Receipts Clerk. Ms.
Angelina Jolie had paid RM6,500.00 as full repayment for Sales
Invoice No. 238902. The Cash Receipts Clerk took the cash but
did not record it in the Prelisting of Cash Receipts. As a result
the cash receipt was not taken up in the Cash Receipts Journal.

At the same time, the Returns Clerk issued a Credit Memo


addressed to Ms. Angelina Jolie, but did not physically send it to
her.

Auditors: Will find that there is no Goods Return Note for


returned goods, because the goods were never returned.

[Credit memoranda can be used to cover 6uthorized6d


shipments of goods or conceal a misappropriation of cash. E.g.
when a staff ships goods/steals cash, he applies a credit
memorandum against the relevant Accounts Receivable
subsidiary ledger. The debtors account balance is therefore
correct, and there will be no complaints.]
AUDIT PROGRAMME REVENUE CYCLE

SUBSTANTIVE PROCEDURES TRANSACTIONS RELATED TO ACCOUNTS RECEIVABLE

Audit objective Audit procedure Findings


Validity For a sample of sales transactions recorded in the sales You have already performed this test above.
journal, trace sales invoices back to sales orders & shipping
documents.
Completeness Trace a sample of shipping documents to the details of the You have already performed this test above.
sales invoices & to the sales journal & customers Accounts
Receivable subsidiary ledger.
Cut-off Compare the dates on a sample of sales invoices with the Use the sales invoices, bills of lading & sales journal that you
shipment dates and with the dates they are recorded in the already have.
sales journal.
No exceptions noted.
Valuation Compare prices & terms on a sample of sales invoices with You have already performed this test above.
the 7uthorized price list & terms of trade.
Accuracy For a sample of sales invoices, test posting to the sales No exceptions noted.
journal & Accounts Receivable subsidiary ledger for the
correct amounts.

SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS

Audit objective Audit procedure Findings


Revenue
To find out any Compare the gross profit No need to compare for industry data.
unrecorded/ percentage by product line with
understated/fictitious previous years & industry data. See Appendix A.
revenue GP margin has remained reasonably consistent.
Compare sales by month (by See Appendix B.
product line) over the year.
Tub ice-cream
sales increased in February, when Bestmart Hypermarket had a Special Sale and
purchased extra stocks.
in May, King Bee made a big purchase of RM550K in the setting up of its retail shop.
Sales of RM66K also made to Tong Hing Supermarkets because of its Dairy Products
Campaign during that month.
General increase in December because of sales to supermarkets/stores in anticipation
of the Christmas/New Year sale.

Cone ice-cream sales increased July onwards because of the installation of a new
rollercoaster ride The Terminator.
AUDIT PROGRAMME REVENUE CYCLE

SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS (Contd.)

Audit objective Audit procedure Findings


To find out any Compare reported revenue to Assume none.
changes in price budgeted revenue.
policies, product Compare individual customer See Accounts Receivable Trial Balance.
pricing problems balances over RM100,000 with
previous years. No major variance as compared to 2005, except for the balance due from King Bee
Retail Shop which has increased by about RM700K. The reason for this is that King Bee
Retail Shop, which is a business owned by the director Wong King Bee, started trading
extensively in 2006, and hence receivables have increased in 2006.
Accounts Receivable, provision for doubtful debts, bad debts
expense
To find out any Compare receivables turnover & No need to compare for industry data.
under/over statement days outstanding in Accounts
of provision for Receivable to previous years See Appendix E.
doubtful debts & bad and/or industry data. Increase of number of days receivables outstanding from 116 to 153 days due
debt expense mainly to the increase in balance due from King Bee Retail Shop. A large part of the
balance outstanding has not been repaid as at 31.12.2006.
Compare aging categories on aged See Accounts Receivable Trial Balance.
trial balance of Accounts Receivable
to previous years. In 2005, debtors repaid the outstanding balances faster. Note that there no
outstanding balances which were more than 6 months as it was the policy of the
company to charge interest of 2% on outstanding balances after 6 months.

2006:
King Bee Retail Shop started trading extensively only in 2006. Because it is a director-
owned business, there is a special trade relationship whereby the company allows it a
looser credit period.
Compare bad debt expense as a % No need to compare for industry data.
of revenue to previous years
and/or industry data. See Appendix D.
Bad debt expense have remained consistent from that of previous year.
Compare provision for doubtful No need to compare for industry data.
debts as a % of Accounts Also, in this case, assume that credit sales = total gross sales.
Receivable or credit sales to
previous years and/or industry See Appendix F.
data. Allowance for uncollectible accounts & charge-off of uncollectible accounts have
Compare bad debt expense as a % remained reasonably consistent from that of previous year.
of Accounts Receivable or credit
sales to previous years and/or
industry data.
Examine large customer accounts To check for any long outstanding balances.
individually & compare to previous None noted.
year.
AUDIT PROGRAMME REVENUE CYCLE

SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS (Contd.)

Audit objective Audit procedure Findings


Sales returns, allowances, sales commissions
Under/over statement Compare sales returns & See Appendix C.
of sales returns allowances as a percentage of
gross sales with previous years (by Sales returns & allowances have remained consistent from that of previous year.
product line).
Note that there are no sales returns/allowances for cone ice-creams ice-creams sold
in the park are never returned, and discounts are never asked for.
Under/over statement Compare sales discounts as a % of See Appendix G.
of sales discounts revenue to previous years and/or
industry data. Sales discounts have remained consistent from that of previous year.
Under/over statement Estimate sales commission expense No need to do this.
of sales commission by multiplying net revenue by
expense & related average commission rate &
accrual compare recorded sales
commission expense.

SUBSTANTIVE PROCEDURES TEST OF BALANCES FOR ACCOUNTS RECEIVABLE & PROVISION FOR DOUBTFUL DEBTS & BAD
DEBT EXPENSE

Audit objective Audit procedure Findings


Validity Review Accounts Receivable Trial Balance for large and Unusual receivable the large overdue balance due from King
unusual receivables. Bee Retail Shop.

King Bee Retail Shop is owned by one of the directors of Ice


Cream Paradise. Hence it is a related party balance.
Confirm Accounts Receivable, using positive confirmations. Obtain the standard confirmation form as used by auditors.
Confirm all amounts over RM100,000. Decide on which amounts you will need to send confirmation
requests to. Review the confirmation request to see how you
can fill it.
Perform alternative procedures for all confirmations not Refer to Accounts Receivable Subsidiary Ledger.
returned on the 1st/2nd request.
(a) Check for subsequent cash receipts after year end. You will not need to do verification of items for this exercise.
(b) Verify items making up the receivables to sales Lecturer will explain.
invoices/shipping documents/official receipts.
All debtors show receipts after the year end (means they are
active debtors) except for King Bee Retail Shop & Kedai Runcit
Ahmad.
Completeness Obtain the aged Accounts Receivable Trial Balance. Agree The General Ledger is not provided to you in this exercise.
the total to the general ledger. Assume that the totals agree.
AUDIT PROGRAMME REVENUE CYCLE

SUBSTANTIVE PROCEDURES TEST OF BALANCES FOR ACCOUNTS RECEIVABLE & PROVISION FOR DOUBTFUL DEBTS & BAD
DEBT EXPENSE

Audit objective Audit procedure Findings


Cut-off Select the last 4 sales transactions from the current years All transactions can be traced to delivery documents and are
sales journal and the first 4 from the subsequent years. proper.
Trace each sales transaction to their shipping/delivery
documents, checking for the date of actual delivery & the
correct recording.
Review the sales journal for large sales returns & Sales returns/allowances have been recorded in the correct
allowances before and after the balance sheet date. period.
Determine whether they are recorded in the correct period.
Ownership Review the minutes of the board of directors meetings and Minutes show that the BOD has approved to pledge its trade
inquire of management to determine whether any receivables in order to secure a term loan from BCB. However,
receivables are pledged/factored. will need to follow up on subsequent minutes to see whether
this was actually done. Also to look at term loan agreement,
letter of pledge, etc if/when term loan is actually obtained.
Review bank confirmations for any liens on receivables. Assume that bank confirmation reply from BCB confirms the
above.
Accuracy Obtain the aged Accounts Receivable trial balance. You have already performed this above.
Agree the total to the general ledger.
Trace selected items from the aged Accounts Receivable For this exercise, no sales invoices are provided. Therefore,
trial balance to the Accounts Receivable subsidiary ledgers assume that items on the Accounts Receivables Subsidiary
& sales invoices for proper amount & aging. Ledger can be properly traced to sales invoices.

All accounts should be correctly traced.


Obtain an analysis of the provision for doubtful debts & bad Assume that all items & totals trace correctly.
debt expense.
Trace the totals to the general ledger.
Trace the individual items to Accounts Receivable subsidiary
ledgers.
AUDIT PROGRAMME REVENUE CYCLE

SUBSTANTIVE PROCEDURES TEST OF BALANCES FOR ACCOUNTS RECEIVABLE & PROVISION FOR DOUBTFUL DEBTS & BAD
DEBT EXPENSE (Contd.)

Audit objective Audit procedure Findings


Valuation Examine the results of the confirmation of Accounts In this examination, we are examining whether the amounts
Receivables. confirmed agree with the amounts in the Accounts Receivable
Subsidiary Ledger. If the amounts dont agree, then we would
need to investigate the difference.

For this exercise, assume that all agree.


Discuss with the credit manager the likelihood of collecting All receivables appear to be collectible as there were
older accounts. Examine subsequent cash receipts & the subsequent receipts after the year end, except for that of King
credit file on all larger accounts over 90 days & evaluate Bee Retail Shop.
whether the receivables are collectible.
However, as King Bee is a related party balance with special
credit terms, the directors of the company were of the opinion
that the amount remains recoverable. [However, to debate
this.]
Evaluate whether the allowance is adequate after Use own judgement.
performing other audit procedures for collectibility of
receivables.
Classification Review the receivables listed on the aged trial balance for None noted.
material credits, long-term receivables & non-trade
receivables.
Disclosure Inquire whether there are any related party receivables. King Bee Retail Shop is owned by one of the directors of Ice
Ensure that they are properly disclosed. Cream Paradise. Hence it is a related party balance.
Review receivables listing for any accounts that have been You will need to ask the client about this.
pledged, assigned or discounted.
None pledged other than that mentioned in the BOD minutes
(pledged to BCB).
AUDIT PROGRAMME REVENUE CYCLE

A ppendix A

Tub ice-cream Cone ice-cream Tot al


2006 2005 2006 2005 2006 2005
Sales 1,219,794.00 1,036,824.90 356,987.00 273,645.00 1,576,781.00 1,310,469.90
Gross profit 731,876.40 622,094.94 178,493.50 136,822.50 910,369.90 758,917.44
GP margin 60% 60% 50% 50% 58% 58%

Appendix B

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Total
Tub ice-cream -
Monthly sales for
2006 4,604 150,987 - - 663,568 - 67,000 25,000 - 74,820 28,500 205,315 1,219,794
Cone ice-cream -
Monthly sales for
2006 10,368 11,620 9,687 9,871 10,300 10,231 51,226 56,784 53,213 49,031 45,654 39,002 356,987

Appendix C

Tub ice-cream Cone ice-cream Tot al


2006 2005 2006 2005 2006 2005
Sales 1,219,794.00 1,036,824.90 356,987.00 273,645.00 1,576,781.00 1,310,469.90
Sales returns & allowances 60,989.70 51,841.25 - - 60,989.70 51,841.25
5% 5%

Appendix D

Tot al
2006 2005
Sales 1,576,781.00 1,310,469.90
Bad debt expense 78,839.05 65,523.50
5% 5%
AUDIT PROGRAMME REVENUE CYCLE

Appendix E

2006 2005 2004


RM RM RM
Sales 1,576,781.00 1,310,469.90
Accounts receivables 1,023,313.00 300,629.00 536,245.00

Average receivables 661,971.00 418,437.00


No. of days receivables outstanding (days) 153.24 116.55

Appendix F

2006 2005
Sales 1,576,781.00 1,310,469.90
Accounts receivables 1,023,313.00 300,629.00

Provision for doubtful debts 10,233.13 3,006.29


- as % of credit sales 0.65% 0.23%
- as % of Accounts Receivables 1.00% 1.00%

Bad debts written off 5,233.13 1,550.31


- as % of credit sales 0.33% 0.12%
- as % of Accounts Receivables 0.51% 0.52%

Appendix G

2006 2005
RM RM
Sales 1,576,781.00 1,310,469.90
Sales discounts 70,955.15 60,281.62

Sales discounts as % of revenue 4.50% 4.60%