Revenue Collection Cycle Overview

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Questions and Answers

What is the primary purpose of balancing the accounts receivable subsidiary ledger?

To enhance sales growth

To ensure accurate segment reporting

To simplify recordkeeping

To prevent omissions in postings (correct)

How can an auditor verify the classification of accounts in sales?

By reviewing the cash register prints

By checking for the approval signature on invoices (correct)

By analyzing the sales trends

By calculating the total sales volume

What key document must an auditor compare to ensure the existence of a recorded transaction?

The sales journal (correct)

The employee time card

The annual budget report

The general ledger summary

What aspect is crucial for generating accurate segment reporting in sales?

Proper classification of sales Signup and view all the answers

Which of the following is NOT a procedure the auditor would follow when testing sales transactions?

Assessing the performance of sales personnel Signup and view all the answers

What does the auditor need to confirm during credit approval testing?

The presence of necessary management signatures Signup and view all the answers

Which procedure is involved in testing the accuracy of recorded sales transactions?

Verifying prices listed on the sales invoices Signup and view all the answers

What consequence could arise from the absence of control over the accounts receivable subsidiary ledger?

Potential for careless recordkeeping Signup and view all the answers

What should be indicated by signatures on invoices?

Independent checking for proper pricing Signup and view all the answers

Which of the following is NOT part of the procedures for checking shipping documents?

Complying with regulatory shipping standards Signup and view all the answers

What is a potential consequence of ineffective internal controls related to sales transactions?

Recording of fictitious sales Signup and view all the answers

What should be observed to ensure proper cutoff of sales at year-end?

Examining shipping document timestamps Signup and view all the answers

Which of the following actions indicates a possible internal control weakness?

Top management pressuring employees to meet sales targets Signup and view all the answers

What type of correspondence files should be reviewed for resolving complaints?

Client’s correspondence files Signup and view all the answers

What does examining signatures on sales invoices help to ensure?

Recheck of account coding Signup and view all the answers

Which of the following is a risk of misstatement related to ineffective internal control?

Early recognition of revenue Signup and view all the answers

What mistake is made when sales are recorded for the next year as current year sales?

Cutoff error occurs Signup and view all the answers

What occurs when revenue is recorded despite the likelihood of goods being returned?

Misstatement of revenue is likely Signup and view all the answers

When should franchise revenue be recorded?

When significant services must still be performed by the seller Signup and view all the answers

What could lead to misstatement when using the percentage-of-completion method?

Recording completion percentages inaccurately Signup and view all the answers

What impact does an ineffective billing process have on revenue recognition?

Records sales based solely on customer payments Signup and view all the answers

When is revenue considered unearned?

When significant obligations remain after the sale Signup and view all the answers

What is a common issue arising from cutting off sales too early?

Revenue is recognized in the next accounting period Signup and view all the answers

What issue is created by recording sales based on receipt of orders rather than shipment?

Sales are overstated Signup and view all the answers

What is the primary purpose of the accounts receivable subsidiary ledger?

To balance with the general ledger control account Signup and view all the answers

Which audit procedure is used to confirm the accuracy of account coding for recorded sales?

Observation of the procedure Signup and view all the answers

Which audit objective focuses on recording sales that are authorized?

Occurrence and validity Signup and view all the answers

What is a key procedure in the substantive tests of sales transactions?

Tracing sales journal entries to sales documents Signup and view all the answers

What method is used to confirm the amounts recorded in the accounts receivable master file?

Footing subsidiary ledger using GAS Signup and view all the answers

In the context of audit assertions, rights and obligations relates to what?

Ownership of the recorded sales Signup and view all the answers

Which of the following is a common substantive test conducted irrespective of controls?

Reviewing documentation for large transactions Signup and view all the answers

What is the role of GAS in the substantive audit procedures for sales transactions?

To select a sample of sales invoices Signup and view all the answers

What is the purpose of tracing sales invoices to shipping documents?

To ensure sales transactions are properly classified Signup and view all the answers

Which procedure is NOT typically used by auditors when examining sales transactions?

Reviewing bank statements for unrelated transactions Signup and view all the answers

What can indicate that an entity's control over sales transactions was properly performed?

Accumulation of shipping documents before recording a sale Signup and view all the answers

When performing cutoff tests, which document would auditors examine to verify the recording of transactions?

Shipping document Signup and view all the answers

Which is a key aspect that auditors check to determine if a sale was properly recorded?

The presence of a prenumbered document Signup and view all the answers

What should an auditor look for to confirm the entity’s right to a receivable from a sale?

Indications of consigned shipments treated as sales Signup and view all the answers

What does examining cash receipts help auditors determine?

The completeness of sales transaction records Signup and view all the answers

What can be concluded if an auditor finds a discrepancy between the entries in the sales journal and the shipping document?

There may be errors in sales recording Signup and view all the answers

What is the primary focus for auditors when testing sales returns and allowances?

Testing the existence of recorded transactions Signup and view all the answers

What can material unrecorded sales returns and allowances result in for a company?

An overstatement of net income Signup and view all the answers

Which objective is often overlooked when auditing sales adjustments?

Completeness objective Signup and view all the answers

What should management do before charging off uncollectible accounts?

Conduct a thorough investigation of the reasons for non-payment Signup and view all the answers

What type of audit test is often performed for cash discounts?

Substantive tests of account balances Signup and view all the answers

How can clients potentially disguise a defalcation related to accounts receivable write-offs?

By charging off already collected accounts receivable. Signup and view all the answers

What is a common audit methodology for controls over sales adjustments?

It is the same as that for controls over sales transactions. Signup and view all the answers

What does the audit of uncollectible accounts significantly focus on?

Existence of authorized transactions Signup and view all the answers

Study Notes

Revenue and Collection Cycle

Consists of activities related to the exchange of goods/services and collecting revenue from customers.
Includes sales (cash & credit), sales adjustments (discounts, returns, uncollectible accounts), and cash receipts.
Key accounts affected include Sales, Accounts Receivable, Sales Returns/Allowances, Cash, Sales Discounts, Allowance for Uncollectible Accounts, Uncollectible Accounts Expense, and Inventories.

Documents Used

Customer Purchase Order: Shows customer's order of goods.
Sales Order: Seller's understanding of sales terms (includes credit approval & shipment authorization).
Shipping Document/Bill of Lading: Details shipped merchandise (quantity, description). Confirms goods were shipped.
Sales Invoice: Shows sold goods' description, quantity, price, terms. Essential for recording sales.
Credit Memo: Reduces amount due from customer (e.g., returned goods, allowances). Matches sales invoice format.
Remittance Advice: Accompanies payment checks, identifying invoices paid.
Uncollectible Account Authorization Form: Authorizes write-off of uncollectible accounts.
Monthly Statement: Sent to customers, detailing account activity (balance, sales, payments, etc.).

Accounting Records

Sales Journal: Records sales transactions (product lines, accounts receivable, debits/credits).
Sales Returns and Allowances Journal: Records returns and price adjustments.
Cash Receipts Journal: Records cash receipts from collections, cash sales, and other cash receipts.
General Journal: Records transactions not suited for special journals (e.g., uncollectible accounts expense).
Accounts Receivable Master File/Subsidiary Ledger: Tracks individual customer accounts and balances.
Accounts Receivable Trial Balance: Lists amount owed by each customer at a specific point in time. Comes from the master file.

Audit of Sales Transactions

Tests of Controls: Focus on evaluating if internal controls over sales and receivables are effective. Used to understand the client's internal process.
Existence or Occurrence: Ensures recorded sales are for actual shipments to customers.
Rights and Obligations: Verifies recorded sales relate only to the company's transactions.
Completeness: Assesses if all sales transactions are recorded.
Valuation or Allocation: Ensures sales were correctly billed and recorded.
Presentation and Disclosure: Checks if sales and receivables are presented and disclosed correctly in the financial statements.

Audit of Sales Adjustments Transactions

Focuses on adjustments to sales like discounts, allowances, returns, and write-offs of uncollectible accounts.
Tests for validity: Checks if recorded transactions are accurate.
Tests for Completeness: Determines all returns/adjustments are recorded.
Crucial to prevent concealing misappropriations through fictional adjustments.

Audit of Cash Receipts Transactions

Covers cash collection processes from customers.
General: Encompasses existence, completeness, rights, obligations, valuation, and disclosure.
Specific concerns: Actual cash collections recorded, all receipts are processed, all collections deposited, proper valuations, and compliance with presentation/disclosure rules.
Crucial to prevent cash misappropriation or lapping.

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Description

Explore the essential activities and documents involved in the revenue and collection cycle. This quiz covers key concepts such as sales, accounts receivable, and cash receipts, along with important documents like sales orders and invoices. Test your understanding of this critical aspect of business accounting.