AUDIT PROGRAMME REVENUE CYCLE

TEST OF CONTROLS REVENUE TRANSACTIONS Audit Objective General Validity (to find out whether there are fictitious sales, or incidences whereby sales is recorded but goods not shipped/services not performed) Audit procedure Observe & evaluate proper segregation of duties between: Findings Since it not possible for you to observe anything here, think about why the segregation of duties is important. Unauthorised shipments to fictitious customers without going through the billing control procedures unrecorded sales transactions & theft of goods. Sales can be made to customers who are not creditworthy. Unauthorised shipments can be concealed unrecorded sales transactions & theft of goods. Cash can be diverted & shortage of cash can be covered in the accounting records theft. No exceptions noted. Bill of lading should show references to sales invoice. Your lecturer is the client. Ask her what are the client 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. Your lecturer is the client. Ask her about this matter. 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.

(i) shipping function & the order entry & billing functions.

(ii) credit & billing functions. (iii) Accounts Receivable & GL functions. (iv) cash receipts & Accounts Receivable. Test 5 sales invoices and look for the relevant authorised sales order & shipping document (bill of lading). Review & test client procedures for accounting for numerical sequence of sales invoices.

Review & test client procedures for mailing & handling complaints about monthly customer statements.

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TEST OF CONTROLS REVENUE TRANSACTIONS (Contd.) Audit Objective Completeness (to find out whether there are any incidences where goods are shipped/services performed but revenue not recorded) Audit procedure Review & test clients procedures for accounting for numerical sequence of shipping documents & sales invoices. Trace a sample of shipping documents (e.g. bill of lading) to their respective sales invoices & to the sales journal. Test a sample of daily reconciliations between sales invoices to daily sales report. Examine the open-order file for unfilled orders older than 2 months. Findings You have already performed this test for sales invoices above. Just perform the test for shipping documents. Use the shipping documents & sales invoices that you have on hand. Trace to sales journal for Feb 2006. No exceptions noted. Trace sales invoices for 5 Feb 2006 to the relevant Daily Sales Report. No exceptions noted. Assume that there are no unfilled orders more than 2 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. Must have a minimum delay. No exceptions noted. Must have a minimum delay. No exceptions noted.

Timeliness (to avoid revenue transactions from being recorded in the wrong period)

Compare the dates on sales invoices with the dates of the relevant shipping documents. Compare the dates on the sales invoices to the dates they were recorded in the sales journal.

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TEST OF CONTROLS REVENUE TRANSACTIONS (Contd.) Audit Objective Authorisation (to avoid incidences where goods are shipped/services performed for a customer who is a bad credit risk; to avoid shipments/services performed at unauthorised prices or on unauthorised terms) Authorisation Valuation Valuation (to ensure that sales transaction is recorded at the correct amount) Classification (to ensure that the sales transaction is properly classified) Posting & summarisation (to ensure correct posting to sales journal or customers accounts in the Accounts Receivable subsidiary ledger, and from sales journal to the general ledger) Audit procedure Review the clients procedures for granting credit to customers. Findings Your lecturer is the client. Ask her about this matter. Lecturers response: When sales order is received, the order is passed to the Finance Manager for credit approval. The Finance Manager will review the customers credit rating with the company. If it is positive, then credit approval will be given. No exceptions noted. You have already performed this test above.

Examine sales orders for evidence of credit approval. Ensure that all shipping documents are accompanied by authorised sales orders.

Compare prices/terms on sales invoices to authorised price list & terms of trade. Examine the sales invoice for evidence that a client personnel verified mathematical accuracy (look for the initials of the staff who did the verification). Recompute the information on a sample of 5 sales invoices. Review the sales journal & general ledger for proper classification of accounts. Examine sales invoices for proper classification. Examine the reconciliation of sales invoices to daily sales report. Examine the reconciliation of entries from sales journal to Accounts Receivable subsidiary ledger. Review the reconciliation of Accounts Receivable subsidiary ledger to general ledger control account. Review & test client procedures for mailing & handling complaints related to monthly customer statements.

No exceptions noted. No exceptions noted. No exceptions noted. No exceptions noted. No exceptions noted. You have already performed this above. No exceptions noted. Credit Memo C01231 re: sales return by Steven Spielsberg has not been recorded in the general ledger. You have already performed this above.

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TEST OF CONTROLS CASH RECEIPT TRANSACTIONS Audit objective Validity (to avoid incidences whereby cash receipts are recorded, but not received or deposited in the bank account) Completeness Review monthly bank reconciliations to ensure that they have been independently reviewed. Audit procedure Observe & evaluate the proper segregation of duties between the cash receipts & Accounts Receivables function. Findings Since it not possible for you to observe anything here, think about why the segregation of duties is important. Otherwise, staff could receive money, pocket it. When next debtor pays up, he records the receipt in the cash account AND applies that receipt against Customer 1s account (Dr Cash/Bank; Cr A/cs Receivable). No complaints from the AR 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. For our exercise, use only 1 bank reconciliation, i.e. bank reconciliation statement for Standard Chartered Bank Malaysia (Feb 2006) only. No exceptions noted. Use cheques received for March 2006 only. No exceptions noted. In real life, these cheques would have been already banked-in. Use the pre-listing for 15 March 2006. No exceptions noted. For daily cash receipts, you may refer to the pre-listing for 15 March 2006. Trace to available Accounts Receivable from the Accounts Receivable Subsidiary Ledger only. No exceptions noted. You have already performed this above. Use the daily pre-listing of cash receipts dated 15 March 2006. For banking in, refer to the relevant bank deposit slip. Noted that cash receipts are deposited into the bank 3 days after receipt (18.3.2006) not very timely. No discounts were given.

Completeness (to ensure that cash receipts are not stolen or lost before being recorded)

Ensure that all cheques received are payable in the name of the company (crossed Account Payee Only). Examine daily pre-listing of cash receipts. Test the reconciliation of daily cash receipts with posting to Accounts Receivable subsidiary ledger.

Timeliness (to ensure that cash receipts are not recorded in the wrong period) Authorisation (to ensure that cash discounts are properly given)

Inquire of client personnel about the handling of monthly customer statements & the examination of resolution of complaints. Examine cash receipts to see whether they are deposited into the bank daily.

Test a sample of cash receipts transactions for proper cash discounts.

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TEST OF CONTROLS CASH RECEIPT TRANSACTIONS (Contd.) Audit objective Valuation (to ensure that cash receipts are recorded at the proper amount) Classification (to ensure that cash receipts are recorded in the correct account) Posting & 5uthorized5d5 (to ensure that cash receipts are posted to the right customer account, and properly posted to the right general ledger accounts) Audit procedure Review & test that the daily remittance report is reconciled to the control listing of remittance advices. Review monthly bank reconciliations to ensure that they have been independently reviewed. Trace cash receipts from the cash receipts listing to the cash receipts journal for proper classification. Review the cash receipts journal for unusual items. Review & test the daily reconciliation of daily remittance report with postings to the cash receipts journal & Accounts Receivable subsidiary ledger. Findings Use Daily Remittance Report for 18 March 2006. No exceptions noted. You have already performed this above. Use the daily pre-listing of cash receipts dated 15 March 2006 & trace to cash receipts journal for March 2006. No exceptions noted. No exceptions noted. Use Daily Remittance Report for 18 March 2006, trace to cash receipts journal for March 2006 and the Accounts Receivable subsidiary ledger that you have already obtained. No exceptions noted. (Traced only the transaction with Steven Spielberg on AR sub ledger.) You have already performed this above. No exceptions noted. You have already performed this above.

Review & test client procedures for mailing & handling complaints related to monthly customer statements. Review the posting from the cash receipts journal to the general ledger. Examine the reconciliation of Accounts Receivable subsidiary ledger to the general ledger.

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TEST OF CONTROLS SALES RETURNS & ALLOWANCES TRANSACTIONS Audit objective Validity Audit procedure Ensure that the credit memorandum (for returned goods or discounts allowed or bad debts written off) is approved by a person other than the personnel who initiated it. Ensure that a credit memorandum for returned goods is supported by a receiving document indicating that goods have been returned. Findings Ask for the credit memoranda for returned goods. No exceptions noted for approval of credit memo wrt Steven Spielbergs return. 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.]

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

Valuation Accuracy

SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS Audit objective Revenue To find out any unrecorded/ understated/fictitious revenue Audit procedure Compare the gross profit percentage by product line with previous years & industry data. Compare sales by month (by product line) over the year. Findings No need to compare for industry data. See Appendix A. GP margin has remained reasonably consistent. See Appendix B. 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.

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SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS (Contd.) Audit objective To find out any changes in price policies, product pricing problems Audit procedure Compare reported revenue to budgeted revenue. Compare individual customer balances over RM100,000 with previous years. Findings Assume none. See Accounts Receivable Trial Balance. 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 & under/over statement days outstanding in Accounts of provision for Receivable to previous years doubtful debts & bad and/or industry data. debt expense Compare aging categories on aged trial balance of Accounts Receivable to previous years.

No need to compare for industry data. See Appendix E. Increase of number of days receivables outstanding from 116 to 153 days due 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. See Accounts Receivable Trial Balance. 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 directorowned business, there is a special trade relationship whereby the company allows it a looser credit period. No need to compare for industry data. See Appendix D. Bad debt expense have remained consistent from that of previous year. No need to compare for industry data. Also, in this case, assume that credit sales = total gross sales. See Appendix F. Allowance for uncollectible accounts & charge-off of uncollectible accounts have remained reasonably consistent from that of previous year.

Compare bad debt expense as a % of revenue to previous years and/or industry data. Compare provision for doubtful debts as a % of Accounts Receivable or credit sales to previous years and/or industry data. Compare bad debt expense as a % of Accounts Receivable or credit sales to previous years and/or industry data. Examine large customer accounts individually & compare to previous year.

To check for any long outstanding balances. None noted.

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SUBSTANTIVE PROCEDURES ANALYTICAL PROCEDURES FOR ACCOUNTS RECEIVABLE & RELATED ACCOUNTS (Contd.) Audit objective Audit procedure Sales returns, allowances, sales commissions Under/over statement Compare sales returns & of sales returns allowances as a percentage of gross sales with previous years (by product line). Under/over statement of sales discounts Under/over statement of sales commission expense & related accrual Compare sales discounts as a % of revenue to previous years and/or industry data. Estimate sales commission expense by multiplying net revenue by average commission rate & compare recorded sales commission expense. Findings See Appendix C. Sales returns & allowances have remained consistent from that of previous year. 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. See Appendix G. Sales discounts have remained consistent from that of previous year. No need to do this.

SUBSTANTIVE PROCEDURES TEST OF BALANCES FOR ACCOUNTS RECEIVABLE & PROVISION FOR DOUBTFUL DEBTS & BAD DEBT EXPENSE Audit objective Validity Audit procedure Review Accounts Receivable Trial Balance for large and unusual receivables. Findings Unusual receivable the large overdue balance due from King 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. Obtain the standard confirmation form as used by auditors. Decide on which amounts you will need to send confirmation requests to. Review the confirmation request to see how you can fill it. Refer to Accounts Receivable Subsidiary Ledger. You will not need to do verification of items for this exercise. Lecturer will explain. All debtors show receipts after the year end (means they are active debtors) except for King Bee Retail Shop & Kedai Runcit Ahmad. The General Ledger is not provided to you in this exercise. Assume that the totals agree.

Confirm Accounts Receivable, using positive confirmations. Confirm all amounts over RM100,000. Perform alternative procedures for all confirmations not returned on the 1st/2nd request. (a) Check for subsequent cash receipts after year end. (b) Verify items making up the receivables to sales invoices/shipping documents/official receipts.

Completeness

Obtain the aged Accounts Receivable Trial Balance. Agree the total to the general ledger.

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SUBSTANTIVE PROCEDURES TEST OF BALANCES FOR ACCOUNTS RECEIVABLE & PROVISION FOR DOUBTFUL DEBTS & BAD DEBT EXPENSE Audit objective Cut-off Audit procedure Select the last 4 sales transactions from the current years sales journal and the first 4 from the subsequent years. 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 & allowances before and after the balance sheet date. Determine whether they are recorded in the correct period. Review the minutes of the board of directors meetings and inquire of management to determine whether any receivables are pledged/factored. Review bank confirmations for any liens on receivables. Accuracy Obtain the aged Accounts Receivable trial balance. Agree the total to the general ledger. Trace selected items from the aged Accounts Receivable trial balance to the Accounts Receivable subsidiary ledgers & sales invoices for proper amount & aging. Obtain an analysis of the provision for doubtful debts & bad debt expense. Trace the totals to the general ledger. Trace the individual items to Accounts Receivable subsidiary ledgers. Findings All transactions can be traced to delivery documents and are proper.

Sales returns/allowances have been recorded in the correct period. Minutes show that the BOD has approved to pledge its trade receivables in order to secure a term loan from BCB. However, 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. Assume that bank confirmation reply from BCB confirms the above. You have already performed this above. For this exercise, no sales invoices are provided. Therefore, assume that items on the Accounts Receivables Subsidiary Ledger can be properly traced to sales invoices. All accounts should be correctly traced. Assume that all items & totals trace correctly.

Ownership

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SUBSTANTIVE PROCEDURES TEST OF BALANCES FOR ACCOUNTS RECEIVABLE & PROVISION FOR DOUBTFUL DEBTS & BAD DEBT EXPENSE (Contd.) Audit objective Valuation Audit procedure Examine the results of the confirmation of Accounts Receivables. Findings In this examination, we are examining whether the amounts 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. All receivables appear to be collectible as there were subsequent receipts after the year end, except for that of King Bee Retail Shop. 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.] Use own judgement. None noted. King Bee Retail Shop is owned by one of the directors of Ice Cream Paradise. Hence it is a related party balance. You will need to ask the client about this. None pledged other than that mentioned in the BOD minutes (pledged to BCB).

Discuss with the credit manager the likelihood of collecting older accounts. Examine subsequent cash receipts & the credit file on all larger accounts over 90 days & evaluate whether the receivables are collectible.

Classification Disclosure

Evaluate whether the allowance is adequate after performing other audit procedures for collectibility of receivables. Review the receivables listed on the aged trial balance for material credits, long-term receivables & non-trade receivables. Inquire whether there are any related party receivables. Ensure that they are properly disclosed. Review receivables listing for any accounts that have been pledged, assigned or discounted.

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A ppendix A
Tub ice-cream 2006 2005 1,219,794.00 1,036,824.90 731,876.40 622,094.94 60% 60% Cone ice-cream 2006 2005 356,987.00 273,645.00 178,493.50 136,822.50 50% 50% Tot al 2006 2005 1,576,781.00 1,310,469.90 910,369.90 758,917.44 58% 58%

Sales Gross profit GP margin

Appendix B
Jan Tub ice-cream Monthly sales for 2006 Cone ice-cream Monthly sales for 2006 Feb Mar Apr May June July Aug Sept Oct Nov Dec Total

4,604

150,987

663,568

67,000

25,000

74,820

28,500

205,315

1,219,794

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 2006 2005 1,219,794.00 1,036,824.90 60,989.70 51,841.25 5% 5% Cone ice-cream 2006 2005 356,987.00 273,645.00 Tot al 2006 2005 1,576,781.00 1,310,469.90 60,989.70 51,841.25

Sales Sales returns & allowances

Appendix D
Tot al 2006 2005 1,576,781.00 1,310,469.90 78,839.05 65,523.50 5% 5%

Sales Bad debt expense

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Appendix E
2006 RM 1,576,781.00 1,023,313.00 661,971.00 153.24 2005 RM 1,310,469.90 300,629.00 418,437.00 116.55 2004 RM 536,245.00

Sales Accounts receivables Average receivables No. of days receivables outstanding (days)

Appendix F
2006 1,576,781.00 1,023,313.00 10,233.13 0.65% 1.00% 5,233.13 0.33% 0.51% 2005 1,310,469.90 300,629.00 3,006.29 0.23% 1.00% 1,550.31 0.12% 0.52%

Sales Accounts receivables Provision for doubtful debts - as % of credit sales - as % of Accounts Receivables Bad debts written off - as % of credit sales - as % of Accounts Receivables

Appendix G
2006 RM 1,576,781.00 70,955.15 4.50% 2005 RM 1,310,469.90 60,281.62 4.60%

Sales Sales discounts Sales discounts as % of revenue