Chapter 9

Chapter 9

Chapter 7 Revenue and Collection Cycle Accounting 408 Chapter 7 1 Accounting 408 Chapter 7 2 1. Internal Control (cont) Accounting 408 Chapter 7 3 1. Internal Control Internal control over sales

separate functions: receiving customer order, credit approval, filling and shipping sales order, billing customers, recording the sales documents and records: customer order, sales order, shipping documents, sales invoice, approved customer list, authorized price list, sales journal, A/R subsidiary A/R general account Accounting ledger, 408 Chapterledger 7 4 1. Internal Control (cont) Internal control over cash receipts

general rules for handling cash separate functions: receiving cash, depositing cash, recording the transactions controls over cash sales, payments received through the mail documents and records: remittance advice, cash receipts list, daily cash summary, deposit slip Accounting 408 Chapter 7 5 1. Internal Control (cont) Internal control over sales adjustments type of sales adjustments

cash discounts sales returns and allowances writing off uncollectible accounts separate functions: cash handling, cash recording, sales adjustments documents and records: credit memos, write-off authorization memo Accounting 408 Chapter 7 6 10. Financial Statement Assertions (Cont) Account Balances

Existence * Rights and obligations * Completeness * Valuation and allocation * * PCAOB Assertions ACCT-4080 Transactions Disclosures Occurrence * Occurrence Rights and obligations Completeness Accuracy Completeness Valuation and allocation Accuracy

Cutoff Classification Chapter 1 Classification* Understandability * 7 1. Internal Control (cont) Sales transactions audit objectives Recorded sales transactions actually occurred Existing sales transactions are recorded Sales transactions are recorded accurately

Sales transactions are recorded on correct dates Sales transactions are7 classified correctly Chapter Accounting 408 8 Accounting 408 Chapter 7 9 2. Substantive Tests Accounts receivable balance objectives recorded A/R exist

client has rights to A/R existing A/R are included A/R is stated at realizable value Accounting 408 Chapter 7 10 2. Substantive Tests Accounts Receivable Confirmations

requirements controlling process requests not to confirm types - positive, negative, others balances, transactions effectiveness returned mail

improving response rates disclaimers and other restrictions in confirmation responses Examination of subsequent cash collections Inquiry of sales or factoring of A/R (evaluate clients rights to A/R) Vouching and tracing transactions Cutoff tests - sales and cash Analytical procedures (often use SAP for revenue accounts) (examples)

Evaluate adequacy of allow. for uncollectibles Search for related party receivables Accounting 408 Chapter 7 11 Positive Confirmation Accounting 408 Chapter 7 12 2. Substantive Tests Accounts Receivable

Existence and Occurrence Rights and Obligations confirmation, vouching, cut-off tests vouching, confirmation, determine if factored or assigned Completeness analytical procedures, tracing, cut-off tests, confirmation Accounting 408 Chapter 7 13

2. Substantive Tests Accounts Receivable Valuation evaluate adequacy of allowance, subsequent cash collections, vouch recorded receivables Presentation and Disclosure compare statement presentation to GAAP related party transactions, pledged, assigned, or factored receivables Accounting 408 Chapter 7 14

3. Fraudulent Revenue Recognition Schemes Obvious accounting violations Fictitious sales or fake customers Premature recording of sales Inflated sales Accounting 408 Chapter 7 15 3. Fraudulent Revenue Recognition Schemes Earnings management - At what point does managing earnings become fraud?

Pushing the limits of accounting standards Changing accounting policies and estimates midstream with positive impact Exploitation of accounting methods to distort actual performance of organization Accounting 408 Chapter 7 16 3. Fraudulent Revenue Recognition Schemes Transactions lacking integrity Quality of earnings issues

The following often have an element of collusion Roundtrip transactions Channel stuffing Bill and hold transactions Halliburton Related party transactions Accounting 408 Chapter 7 17 3. Fraudulent Revenue Recognition

Schemes Non-top line income sources methods Investments and related income Sales of investments or fixed assets Factoring receivables Sale of obsolete inventory Any other asset sales representing unsustainable revenue sources Accounting 408 Chapter 7 18 3. Fraudulent Revenue Recognition Schemes

Cover up methods Backdating invoices, agreements Manipulation of dates shipped on docs Customer statements hold, destroy, alter Falsify customer confirmations Delay recording credit memos Ship goods to third party warehouse

Lapping receivable transactions Accounting 408 Chapter 7 19 3. Fraudulent Revenue Recognition Schemes Detection methods Vouch supporting documents Review cutoff of large sales near YE Perform analytical tests

Review transactions after YE (returns, cancelled orders) Determine methods and consistency of reserves, contras Accounting 408 Chapter 7 20 3. Fraudulent Revenue Recognition Schemes Detection methods

Confirm customers Review shipments to warehouses Examine shipping document signatures Compare ship dates to customer order and requested delivery date Review customer complaints Accounting 408 Chapter 7 21 Review Questions for Discussion Chapter 7.2 7.5 7.6 7.7 7.10 7.11 ACCT-4080

7.19 7.20 7.22 7.23 7.24 7.25 Chapter 1 22

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