ACL SOFTWARE

• ACL
• Data definition
AUDITING THE REVENUE CYCLE • Customizing view
• Filtering data
CHAPTER 9 • Stratifying data
• Statistical analysis

REVENUE CYCLE ACTIVITIES AND

TECHNOLOGIES
• Batch Processing Using Sequential Files—
Manual Procedures
– order taking, credit checking, warehousing, and
shipping are performed manually.
– Computer programs process the accounting
records.

Obtaining and Recording the

Customers’ Orders
• The sales process begins in the sales department • After preparing the sales order, the sales clerk
with the receipt of a customer order indicating files one copy of it in the customer open
the type and quantity of merchandise being order file for future reference
requested
• The primary objective is to ensure that relevant
data about the transaction are transcribed into a
standard format that can be processed by the
selling entity’s system. The document prepared in
this procedure is the sales order.

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 Approving Credit
• transaction authorization, which involves
verifying the customer’s creditworthiness
• credit authorization copy of the sales order is
sent to the credit department for approval.
The returned approval triggers the release of
the other sales order copies simultaneously to
various departments.
• The credit copy is filed in the customer open
order file until the transaction is completed
• The shipping clerk packages the goods
attaches the packing slip to the container,
completes the shipping notice, and prepares a
bill of lading.
Batch Cash Receipts System with
Direct Access Files
• Mailroom
• Cash Receipts Department
• Accounts Receivable (AR) Department
• Data Processing Department
Processing Shipping Orders
• The sales department sends the stock release
(also called the picking ticket) copy of the
sales order to the warehouse
• Before the arrival of the goods and the stock
release copy, the shipping department
receives the packing slip and shipping notice
copies from the sales department
Batch Processing Using Sequential
Files—Automated Procedures
• Keypunch/Data Entry
• Edit Run
• Sort Run
• AR Update and Billing Run
• Sort and Inventory Update Runs
• General Ledger Update Run
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Real-Time Sales Order Entry and Cash
Receipts
• Interactive computer terminals replace many
of the manual procedures and physical
documents. This system provides real-time
input and output with batch updating of only
some of the master files.

Order Entry Procedures Cash Receipts Procedures

• Sales Procedures • In open invoice systems, such as this, each
• Warehouse Procedures invoice is billed and paid individually.
• Shipping and Billing • Cash from customers may be received and
processed as just described or may be sent
directly to a bank lock-box

Features of Real-Time Processing Point-of-Sale (POS) Systems

• Real-time processing greatly shortens the cash • Daily Procedures
cycle of the firm
• End-of-day Procedures
• Real-time processing can give a firm a
competitive advantage in the marketplace
• Manual procedures tend to produce clerical
errors, such as incorrect account numbers, invalid
inventory numbers, and price–quantity extension
miscalculations
• Real-time processing reduces the amount of
paper documents in a system

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 Relationship between Management Assertions
and Revenue Cycle Audit Objectives
Management Assertions Revenue Cycle Audit Objectives

Existence or Occurrence Verify that the accounts receivable

balance represents
amounts actually owed to the
organization at the
balance sheet date.

Establish that revenue from sales

transactions represent
goods shipped and services rendered
during the period
covered by the financial statements.

Completeness Determine that all amounts owed to the Rights and Obligations Determine that the organization has a
organization legal right to
at the balance sheet date are reflected in recorded accounts receivable. Customer
accounts accounts that
receivable. have been sold or factored have been
Verify that all sales for shipped goods, all removed from the
services accounts receivable balance
rendered, and all returns and allowances
for the period
are reflected in the financial statements
Valuation or Allocation Determine that the accounts receivable
Accuracy Verify that revenue transactions are balance states its
accurately computed net realizable value.
and based on current prices and correct Establish that the allocation for
quantities. uncollectible accounts is
Ensure that the AR subsidiary ledger, the appropriate
Sales Invoice
file, and the Remittance file are
mathematically correct
and agree with general ledger accounts.

Presentation and Disclosure
Input Controls
Verify accounts receivable and revenues • Credit Authorization Procedures
reported for the
period are properly described and • Testing Credit Procedures
classified in the
financial statements.
• Data Validation Controls
• Testing Validation Controls
• Batch Controls
• Process Controls
• File Update Controls
• Access Controls
• Physical Controls

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 Credit Authorization Procedures
• The purpose of the credit check is to establish
the creditworthiness of the customer. Only
customer transactions that meet the
organization’s credit standards are valid and
should be processed further
Data Validation Controls
• Input validation controls are intended to
detect transcription errors in transaction data
before they are processed
• Missing data checks are used to examine the
contents of a field for the presence of blank
spaces
• Numeric-alphabetic data checks determine
whether the correct form of data is in a field
Testing Validation Controls
• Data entry errors that slip through edit
programs undetected can cause recorded
accounts receivable and revenue amounts to
be materially misstated
Testing Credit Procedures
• The auditor needs, therefore, to determine that
effective procedures exist to establish
appropriate customer credit limits; communicate
this information adequately to the credit policy
decision makers; review credit policy periodically
and revise it as necessary; and monitor
adherence to current credit policy.
• The auditor can verify the correctness of
programmed decision rules by using either the
test data or integrated test facility (ITF)
approaches to directly test their functionality
• Limit checks determine if the value in the field
exceeds an authorized limit
• Range checks assign upper and lower limits to
acceptable data values
• Validity checks compare actual values in a
field against known acceptable values.
• Check digit controls identify keystroke errors in
key fields by testing their internal validity
Batch Controls
• Batch controls are used to manage high
volumes of transaction data through a system.
• The objective of batch control is to reconcile
output produced by the system with the input
originally entered into the system
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 Process Controls
• Process controls include computerized
procedures for file updating and restricting
access to data
Access Controls
• Access controls prevent and detect
unauthorized and illegal access to the firm’s
assets.
Output Controls
• Output controls are designed to ensure that
information is not lost, misdirected, or
corrupted and that system processes function
as intended
• Accounts Receivable Change Report
• Transaction Logs
• Transaction Listings
• Log of Automatic Transactions
File Update Controls
• Transaction Code Controls
• Sequence Check Control
• Testing File Update Controls
Physical Controls
• Segregation of Duties
– Rule 1. Transaction authorization should be separate
from transaction processing.
– Rule 2. Asset custody should be separate from the
record-keeping task
– Rule 3. The organization should be so structured that
the perpetration of a fraud requires collusion between
two or more individuals
• Supervision
• Independent Verification
SUBSTANTIVE TESTS OF REVENUE
CYCLE ACCOUNTS
• Revenue Cycle Risks and Audit Concerns
• In general, the auditor’s concerns in the
revenue cycle pertain to the potential for
overstatement of revenues and accounts
receivable rather than their understatement
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 Understanding Data
• Recognizing revenues from sales transactions that did not occur
• Recognizing sales revenues before they are realized (i.e., billing
• accessing and extracting data from accounting
customers for items still being manufactured at period-end) files for analysis.
• Failing to recognize period-end cutoff points, thus allowing reported
sales revenues for the current period to be inflated by post-period • To do this, the auditor needs to understand
transactions
• Underestimating the allowance for doubtful accounts, thus the systems and controls that produced the
overstating the realizable value of accounts receivable
• Shipping unsolicited products to customers in one period that are
data, as well as the physical characteristics of
returned in a subsequent period the files that contain them
• Billing sales to the customer that are held by the seller (Special
terms associated with such transactions may require no payment
for a lengthy period of time.)

Testing the Accuracy and

Completeness Assertions
• Customer File • Review Sales Invoices for Unusual Trends and
• Sales Invoice File and Cash Receipts File Exceptions
• Line Item File • Review Sales Invoice and Shipping Log Files for
• Inventory File Missing and Duplicate Items
• Shipping Log File • Review Line Item and Inventory Files for Sales
Price Accuracy
• Testing for Unmatched Records

Testing the Valuation/Allocation

Testing the Existence Assertion
Assertion
• confirmation of accounts receivable  • The auditor’s objective regarding proper
involves direct written contact between the valuation and allocation is to corroborate or
auditors and the client’s customers to confirm refute that accounts receivable are stated at
account balances and transactions net realizable value
• Selecting Accounts to Confirm • Aging Accounts Receivable
• Preparing Confirmation Requests
• Evaluating and Controlling Responses