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Revenue Cycle
(Sales & Collection)
Accounting Department
Auditing II Faculty of Economics
Padjadjaran University
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Learning Objective 1
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Audit Objective
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Nature
An entity’s revenue cycle consists of
activities related to the exchange of goods
and services with customers and to the
collection of the revenue in cash
Revenue transaction
Sales (cash & credit)
Cash receipts
Sales return & allowances
Provision for bad debts
Write-off of uncollectible accounts
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Accounts in the Revenue Cycle
Ending Charge-off of
balance uncollectible Allowance for
accounts Uncollectible
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Accounts in the Revenue Cycle
Allowance for
Accounts Receivable Uncollectible Accounts
Beginning Cash receipts Charge-off of Beginning
balance uncollectible balance
accounts
Sales on Sales returns Estimate of
account and allowances bad debt
expense
Ending Charge-off of
balance uncollectible Ending
accounts balance
Bad Debt
Expense
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Learning Objective 2
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Business Functions
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Sales Transaction
Accounts Business functions Documents and records
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Sales Returns and Allowances
Transaction
Accounts Business functions Documents and records
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Charge-off of Uncollectible
Accounts Transaction
Accounts Business functions Documents and records
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Bad Debt Expense Transaction
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Processing Customer Orders
Customer Order:
A request for merchandise by a customer
Sales Order:
A document describing the goods ordered
by a customer
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Granting Credit
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Shipping Goods
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Billing Customers and Recording
Sales
Billing is the means by which the customer is
informed of the amount due for the goods ordered
Internal controls :
Making sure that all shipments
made have been billed
No shipment has been billed
more than once
Each shipment is billed for
the proper amount
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Billing Customers and Recording
Sales
Sales invoice
Monthly statement
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Processing and Recording Cash
Receipts
Remittance advice
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Processing and Recording Sales
Returns and Allowances
Credit memo
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Charging Off Uncollectible
Accounts Receivable
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Providing for Bad Debts
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Learning Objective 3
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Effect of E-Commerce on the
Sales and Collection Cycle
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Effect of E-Commerce on the
Sales and Collection Cycle
Business-to-business (B2B)
Business-to-consumer (B2C)
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Effect of E-Commerce on the
Sales and Collection Cycle
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Learning Objective 4
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Methodology for Designing
Controls and Substantive Tests
of Sales Transactions for Sales
Understand internal Design tests of controls and
control – sales. substantive tests of transactions
for sales to meet transaction
-related audit objectives.
Assess planned
control risk – sales. Audit procedures
Sample size
Determine extent of Items to select
testing controls. Timing
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Understand Internal Control –
Sales
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Assess Planned Control Risk –
Sales
Adequate separation
of duties
Proper authorization
Adequate documents
and records
Prenumbered
documents
Monthly statements
Internal verification
procedures
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Determine Extent of Testing
Controls
Audits of public
companies
Audits of nonpublic
companies
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Transaction-Related Audit
Objectives for Sales
Existence:
Recorded sales are for shipments actually made.
Completeness:
Existing sales transactions are recorded.
Accuracy:
Recorded sales are for the amount shipped.
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Transaction-Related Audit
Objectives for Sales
Classification:
Sales transactions are properly classified.
Timing:
Sales are recorded on the correct dates.
Duplicate Accounts
Customer Shipping Sales General
order document
sales
journal journal = receivable
invoice master file
Completeness Existence
start start
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Summary of Methodology for
Sales
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Learning Objective 5
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Sales Returns and Allowances
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Sales Returns and Allowances
Emphasis on
Materiality
objectives
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Learning Objective 6
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Tests of Controls and Substantive
Tests of Transactions for Cash
Receipts
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Learning Objective 7
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Audit Tests for Uncollectible
Accounts
Existence of recorded write-offs is the most
important transaction-related audit objective.
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Additional Internal Controls Over
Account Balances
Realizable value
Credit approval
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Additional Internal Controls Over
Account Balances
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Effect of Results of Controls and
Substantive Tests of Transactions
The parts of the audit most affected by the
tests for the sales and collection cycle are:
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Types of Audit Tests for the Sales
and Collection Cycle
Accounts Cash in
Sales Receivable Bank
Sales Cash receipts
transactions transactions
Audited by Audited by
TOC, STOT, and AP TOC, STOT, and AP
Ending Ending
balance balance
Audited by AP and TDB
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