...Lecture 5 Audit of the Sales and Collection Cycle Summary of the Audit Process Phase 1 Plan and design an audit approach 1. Accept client and perform initial planning 2. Understand client’s business and industry 3. Assess client business risk 4. Perform preliminary analytical procedures 5. Set materiality & assess acceptable audit risk and inherent risk 6. Understand internal control and assess control risk 7. Gather information to assess fraud risk 8. Develop overall audit plan and audit program Phase 2 Perform tests of controls & substantive tests of transactions Plan to reduce assessed level of control risk? No Yes Phase 3 Perform analytical procedures and tests of details of balances 1. Perform analytical procedures 2. Perform tests 3. Perform additional tests of details of balances Phase 4 Complete the audit & issue an audit report 1. Perform tests for presentation & disclosure 2. Accumulate final evidence 3. Evaluate results 4. Issue Audit Report 5. Communicate with audit committee & management 1. Perform test of controls 2. Perform substantive tests of transactions 3. Assess likelihood of misstatements in financial statements Accounts in the Sales and Collection Cycle 14-3 Sales and Sales returns Transaction 4 Accounts Sales Accounts receivable Business Functions Processing customer orders Granting credit Shipping goods Billing customers and recording sales Documents & Records Customer order Sales order Customer or sales order Shipping...
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...Its delivery schedule for the week entails deliveries to Belize City on Wednesdays and to Belmopan on Thursdays. The business is comprised of six (8) persons, namely: • Owner - Sue Hufford as the owner is responsible for the more technical operations of the HRI Express. • Marva is responsible in the book aspect of HRI Express. • Six (6) persons who work on the plantation and oversees the production process. Sales and Collection Procedures An overview of HRI Express’s Sales and Collection Cycle is illustrated in Figure 1.1. The cycle begins with the receipt of customer orders via telephone, email or on site. A copy of the customer order is routed to plantation workers who prepare and package the good requested. The number of packages prepared or orders fulfilled per day are properly logged detailing the quantity and weight of packaged goods. Then the good is taken and to the office for delivery. Packages to be delivered are cross checked by the front office personnel to verify that items stated on the customer order are indeed packaged. Duplicate sales receipts...
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...Audit Design Program III Tonya Gaines ACC 546 March 4, 2013 Michael De Marco Audit Design Program III During phase III of the audit plan, Anderson, Olds & Watershed (AOW) will focus on two important cycles: Inventory and Warehousing Cycle and the Cash Cycle. There are six classes of transactions in the inventory and warehousing cycle: process purchase orders, receive raw materials, store raw materials, process of goods, and store finished goods and ship finished goods. Cash account is a part of every cycle except inventory and warehousing. Cash is primarily important and extremely vulnerable to fraud that is why auditor needs to be careful in the assessing risks in auditing cash account. Anderson, Olds & Watershed’s (AOW) responsibility is to conduct a fair and unbiased audit. We will conduct these tests and procedures according to PCAOB auditing standards. There is not absolute assurance that all misstatements or errors will be discovered. Inventory and Warehouse Cycle The audit of the inventory and warehousing cycle is designed to test inventory counts, processes and operations. The classes of transactions in this cycle includes sales, value of inventory, cost of goods sold, sales returns and allowances and estimates of allowance for slow moving inventory. The table below displays the interrelationship of the transactions related to audit objectives, tests of controls, and substantive test of transaction that should be approved during the...
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...the 1988 audit. 2. Audit procedures that might have resulted in Peat Marwick discovering the $5 million bogus sales and the intentional understatement of the company’s sales return are: (http://smallbusiness.chron.com/audit-procedures-revenue-cycles-15750.html) a. Checking the trial balance that the accountant creates at the end of the cycle b. Confirming receivable amounts with the company or person who owes money and evaluating the accuracy of the allowance for uncollectible accounts by reviewing the history of the entity. They also include vouching, tracing and performing cutoff tests for all sales, sales returns and cash receipts. c. Examines all documentation related to a customer and relating journal d. Sales cutoff test. Trace shipping documents immediately prior and just after accounting period to the accounting records. Focus on FOB shipping point and FOB destination. e. Cash receipts cutoff test. Trace daily remittance of payments to accounts receivable credits.al entries 3. Most merchandising and manufacturing clients’ record a sale based on shipment of goods criterion. Audit objectives for sales cutoff focus on ensuring that sales are recorded in the proper period. f. Fraudulent errors the test would have uncovered. i. $6 million of ship in place sales ii. Understated sales return by at least $13 million iii. Earnings of $180 million overstated to reach its target sales for 1988 ...
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...Revenue Cycle (Ch11 Hurt) 92% of Public Companies’ Revenue Processes at Risk for Compliance Failures and Restatements New study by RevenueRecognition.com and IDC reveals widespread reliance on spreadsheets, which greatly increases the likelihood of control weakness and accounting errors. A recent survey of 685 senior financial executives from a broad range of companies, revealed that revenue recognition and reporting activities are not automated within Financial/ERP systems. As a result, 92% of public companies are forced to rely on spreadsheets to fill vital gaps in their revenue reporting processes—despite the fact that spreadsheets are prone to errors, lack audit capabilities, and resist internal controls. This, and other findings, is from a new report by www.RevenueRecognition.com and IDC, “Enterprise Systems and Revenue Recognition: The Missing Link”. Revenue Spreadsheets: The Compliance Killers These results should be alarming for corporate finance departments, executives, and investors alike, because: 1. The risks introduced by spreadsheets violate basic compliance principles. 2. Revenue accounting problems are the leading cause of financial restatements. 3. The number of restatements is on the rise. As a result, compliance managers should be addressing the issue of having spreadsheets in the revenue reporting process. Executives should be extremely cautious about the integrity of the numbers they are attesting to under Sarbanes-Oxley requirements...
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...over the audit of Smackey Dog Foods, Inc. Solution: The SEC (Securities and Exchange Commission) has substantial influence on the audit of Smackey Dog Food, Inc. This can be seen in the audit standards that have to be followed by the established independence of the auditors involved in the Smackey audit. In the audit of public listed companies which includes Smackey, the auditors need to observe several principles. Independence is one of the six principles exhibited by the AICPA and the others include responsibilities such as the public interest, integrity, objectivity and independence, due care, and scope and nature of services. An audit team is required to be objective and independent with regard to professional responsibilities and by being independent in fact and appearance when providing auditing and other attestation services. Under the Sarbanes – Oxley, auditors have to be objective and independent otherwise legal sanctions can be pursued and incurred. Q2: Discuss the essential activities involved in the initial planning of an audit. How do these all specifically to the Smackey Dog Food client? Solution: The following are several essential activities involved in the initial planning of an audit and how they are specifically related to Smackey Dog Food, Inc. : 1. First understand the client’s business and industry. The audit firm can get the full benefit of its experience in auditing other food manufacturers in planning and doing the audit for Smackey...
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...accounting cycles and their impact on audit approaches, and identify the accounts in the revenue cycle. 2 Discuss the importance of proper revenue recognition and the characteristics of revenuerelated fraud. 3 Describe the major types of fraud and misstatements that have occurred in the revenue accounts. 4 Describe how to use analytical procedures to identify possible misstatements in the revenue cycle. 5 Assess inherent and control risk regarding revenue cycle accounts. 6 Use audit procedures to test the effectiveness of controls in the revenue cycle. 7 Link the auditor’s control risk assessment to the development of substantive tests of accounts in the revenue cycle. 8 Describe the factors that influence the effectiveness and efficiency of audits of account balances. 9 Apply auditing concepts to test revenue. 10 Apply auditing concepts to test accounts receivable. 11 Describe fraud indicators in the revenue cycle and related audit procedures. 12 Evaluate the adequacy of a client’s allowance for doubtful accounts. Th om so n LEARNING OBJECTIVES Le ar ni ng ™ The overriding objective of this textbook is to build a foundation to analyze current professional issues and adapt audit approaches to business and economic complexities. Through studying this chapter, you will be able to: CHAPTER OVERVIEW This chapter illustrates the audit concepts developed in Chapters 4 through 9 by applying them to the accounts in the revenue cycle. Sales transactions...
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...divisions and subsidiaries in the organization. | B. | Measuring performance and awarding bonuses based on short-term operating results. | C. | Giving employees performance feedback that considers positive and constructive praise along with critical and negative observations on their work. | D. | Establishing work teams that share responsibilities, performance, and bonuses based on collective efforts. | | | 3. | Which of the following is not considered one of the three factors increasing the probability of fraud? A. | Motive. | B. | Lack of training. | C. | Opportunity. | D. | Rationalization. | | | 4. | Which of the following is ordinarily considered an extended procedure during the independent audit of financial statements? A. |...
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...Chapter 7 – Internal Controls • Key topics: • Know the broad definition of internal control and its purposes, including the objective that is particularly relevant to an audit (i.e. reliability of financial reporting) A process, effected by the entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations (effective and efficient operations), reporting (accurate financial reporting) and compliance (compliance with laws and regulations) • Describe the 5 components of internal control, related examples of each, and how each contributes to the overall control system within an entity (CRIME) 1. Control Environment: The foundation for the other internal control components; it is defined by the standards, processes, and structures that guide individuals in carrying out their duties. Basic principles include: Commitment to integrity and ethical values, Board of directors demonstrates independence from management and exercises effective oversight of internal control, Establishment of effective structure, including reporting lines, and appropriate authorities and responsibilities, Commitment to attract, develop, and retain competent employees, and Holding employees accountable for internal control responsibilities. 2. Risk Assessment: Risk assessment is management's process for identifying, analyzing, and responding to risks from internal and external sources that threaten...
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...management’s inexperience and lack of knowledge of the proper controls related to running a business and the entire accounting aspect. Q1 Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc. SOLUTION: Although Smackey Dog Foods, Inc. is not a publicly traded company the SEC has a significant influence on their audit. During the audit, Keller CPAs will still need to follow the auditing standards put in place by the SEC. AICPA principles will be followed, ensuring that the Keller CPAs are independent of the client and free of conflicts of interest when performing professional responsibilities. Q2 Discuss the essential activities involved in the initial planning of an audit. How do these all specifically relate to the Smackey Dog Food client? SOLUTION: 1. Understand the client’s business and industry. Keller CPAs can use its experience from auditing other manufacturing companies in the audit of Smackey Dog Foods, Inc. The essential part of this step is for the audit team to learn and understand as much as possible of the client’s business and industry. All related parties will be identified in this stage of the planning as well. 2. Assess client business risk. The business risk involved is that Smackey will fail to achieve its objectives. The audit team will assess the risk of material misstatements arising from Smackey’s business risk. 3. Perform preliminary analytical procedures. The function of the auditors here will be to...
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...REVENUE CYCLES AUDIT OBJECTIVES, CONTROLS, AND TEST OF CONTROLS INPUT CONTROLS 1. Credit Authorization Procedures * Only customer transactions that meet the organization’s credit standards are valid and should be processed further. 2. Testing Credit Procedures * It pertains to the valuation/allocation audit objectives and the accuracy objective 3. Data Validation Controls * Input validation controls are intended to detect transcription errors in transaction data before they are processed. Validation procedures are most effective when they are performed as close to the source of transaction as possible. a. Missing Data Check – are used to examine the contents of a field for the presence of blank data or spaces (missing product numbers, missing customer accounts numbers, or incomplete mailing address) b. Numeric-alphabetic data checks – determine whether the correct form of data is in a field. An invoice total should not contain alphabetic data. c. Limit Check-determine if the value In the fields exceeds an authorized limit. (prices limit or discounts limit) 4. Batch Controls – are used to manage high volumes of transaction data through a system. The following are relevant controls: a. A unique batch number b. A batch date c. A transaction code (indicating the type of transactions, such as sales order or cash receipt). d. The numbers of records in the batch (record count) e. The total dollar value of a financial field...
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...of PBL in session 1 is related to the revenue cycle in which consists of sales to cash collections. Revenue cycle is a recurring set of business activities and related information processing operations associated with providing good and services to customer and collecting cash in payment for those sales. The primary objective of revenue cycle is to provide the right product in the right place at the right time for the right price. There are four basic revenue cycle business activities that are sales order entry, shipping, billing and account receivables also cash collection. Sales order entry process entails three steps that are taking the customer’s order, checking and approving the customer credit and checking inventory control. The second basic activity in the revenue cycle is by filling the customer orders and shipping the desired merchandise. It is entail two step that is picking and packing the order also shipping the order. The third basic activity in the revenue cycle involves billing customers and updating the account receivables. The last step in revenue cycle is cash collections in which involve handling the customer remittance and depositing remittance in the bank. Basically, this case is about an audit process made to our client in term of its process of sales and cash receipts document as well as in shipping and billing system. Based on this case, we had made an audit process on the sales order entry, cash receipt, shipping and billing of the client transaction...
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...Auditing Program Design Part II The purpose of this part of the audit process for Apollo Shoes is to design tests of controls, substantive tests of transactions, and analytical procedures for the sales, collection, payroll, personnel, acquisition, and payment cycles. These test and procedures are with intent to attest operating effectiveness of internal controls of Apollo Shoes on the basis of documentation provided. It is with the understanding that with the performing of test and procedures an opinion can be formed but management of Apollo shoes is responsible for the maintenance and assessment internal controls of over financial reporting. The design of test of controls of the sales and collection cycle follows. Sales and Collection Cycle Tests of Controls Sales Cycle: The review of the revenue and collection cycle manual of Apollo Shoes provides the improper record keeping of sales orders and that sales orders are not numbered which may affect the accuracy of pricing on invoices so steps. The test of controls for sale cycle to determine accuracy will be: 1. Examine sample 1004345 for Anglonesia Rehabilitation and Reprogramming Institute invoice to review unit prices of merchandise listed. 2. Compare unit prices on invoice for merchandise to these shoe types from inventory status report of 2007. 3. Verify unit prices on invoices are correct. Collection Cycle: A review of balance confirmation from customers provides a customer of Apollo Shoes Neutralizer’s account...
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...Running Head: Controls for Inflow Internal Controls for Cash, Sales, Accounts Receivable, Inventory, and Production Building a good fraud prevention program is a difficult task. Accountants and auditors have often been exhorted to be the leaders in fraud prevention by employing their skills in designing “tight” control systems. This strategy is, at best, a short-run solution to a large and pervasive problem (Louwers, et. al., 2007). Control systems limit trust; therefore, accountants and auditors must be sensitive to the needs of the business by installing controls that will prevent or detect fraud without impeding business activities. Effective long-run prevention measures are complex and difficult, involving the elimination of the causes of fraud by mitigating the effect of motive, opportunity, and lack of integrity (Louwers, et. al., 2007). When external auditors perform the audit of financial statements, they must obtain an understanding of the company’s control environment, which relates to management activity in the company. Cash An important feature of internal control is the separation of the duties and responsibilities of transaction authorization, record keeping, custody of, or access to, assets, and reconciliation of actual assets to the accounting records (Louwers, et. al., 2007). The key to integrity in business is “accountability,” that is, each person must be willing to put his or her decisions and actions in view. Many organizations begin the...
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...communication that expresses a conclusion about the reliability of a written assertion of another party. Audit of historical financial statements: A form of attestation services, the auditor issues a written report expressing an opinion about whether the F/S is in material conformity (一致) with accounting standards. e.g.: listed company must provide shareholders with annual financial statements that are audited by an independent accounting firm. Review of historical cost financial statements: A form of attestation services, a public accounting firm issues a written report that provides less assurance than an audit as to whether the financial statements are in material conformity with accounting standards. Auditing standards: Establish mandatory (强制) requirements and provide explanatory (解释) guidance to auditors in fulfilling their professional responsibilities in the audit of financial reports. Auditing: Is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. Auditing should be performed by a competent, independent person. Compliance audit: 合规性审计 One of three primary types of audits, a review of an organization’s financial records performed to determine whether the organization is following specific procedure, rules or regulations set by some higher authority. An audit performed to determine whether an entity that receives financial assistance from the Federal Government...
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