Revenue and Receipts Cycle Audit

Revenue and Receipts Cycle Audit

• The revenue and receipts cycle audit focuses on sales and collection processes.
• The revenue phase involves making sales, while the receipts phase ensures payment for services or products.
• Sales can be made in various ways, including cash, credit, and installments, with payments made through cash, credit cards, or electronic transfers.

Revenue and Receipts Cycle Process

• The process involves receiving customer orders, approving credit, determining goods availability, delivering goods, invoicing customers, collecting cash, and recognizing the impact on other accounts.

Risk Assessment Procedures

• Auditors identify and assess risks of material misstatement at the financial statement, account balance, and transaction levels.
• At the financial statement level, there is a risk of manipulating sales to overstate or understate profits, potentially through fictitious sales with related parties.
• At the account balance level, an inadequate allowance for bad debts could overstate accounts receivables.
• At the transaction level, inadequate controls over cash sales or raising sales invoices before goods are picked from the warehouse present risks.

Audit Objectives

• The audit objective for sales transactions focuses on occurrence, accuracy, cut-off, completeness, and classification.
• Occurrence ensures that recorded sales actually occurred and relate to the entity, while accuracy verifies the sales amounts are correct.
• Cut-off ensures sales are allocated to the correct accounting period, completeness confirms all sales are recorded, and classification ensures sales are recorded in the appropriate accounts.
• The audit objective for receipts transactions focuses on occurrence, accuracy, cut-off, completeness, and classification.
• Occurrence ensures that recorded receipts were actually received for amounts owed to the entity, while accuracy verifies the receipts are recorded at the correct amount.
• Cut-off ensures receipts are allocated to the correct accounting period, completeness confirms all receipts are recorded, and classification ensures receipts are recorded in the appropriate accounts.
• The audit objective for receivables balances focuses on existence, rights, completeness, and valuation.
• Existence confirms that trade receivables actually existed at the reporting date, while rights ensure the company has a claim on the trade receivables.
• Completeness verifies that all trade receivables are included, while valuation ensures trade receivables are included at an appropriate carrying value.

Assertions Regarding Presentation and Disclosure

• The directors are also representing the completeness, classification, accuracy, and presentation of all matters regarding balances and transactions in this cycle.

Revenue Recognition

• A sale is recognized only when there is an approved contract to perform a specific obligation that is satisfied, with identifiable rights for each party under the contract.
• The payment terms and commercial substance of the contract are also considered, ensuring the probability of collecting payment.

Responses to Assessed Risks

• Risk Assessment Procedures are performed to understand the entity, and further audit procedures address the assessed risks.
• If controls are operating effectively, substantive tests are performed to detect material misstatements at the assertion level. Otherwise, test of controls procedures are performed to obtain evidence of the effectiveness of controls during the period.

Substantive Testing Audit Procedures

• Substantive testing is determined by the assessed risk of material misstatement and the effectiveness of controls.
• Increased risk and less effective controls typically require more substantive testing, reflected in the size of samples used for testing.

Laybuy Transactions

• Revenue is not recognized until goods are delivered, except when historical experience indicates most layaway transactions convert to sales.
• Revenue can be recognized when a significant deposit is received, provided goods are available for delivery.

This quiz explores the revenue and receipts cycle audit, focusing on sales and collection processes. It covers the phases of revenue generation and receipt collection, including various payment methods and risk assessment procedures auditors use to identify potential misstatements. Test your knowledge on this crucial aspect of financial auditing.