Revenue recognition

Question 1

What entries related to revenue recognition?

Answer 1

Cash. AR, Revenue, AFDA

Question 2

What are 4 fraud practices, that will increase the audit risk? (fraud risks)

Answer 2

Bill and hold arrangements
Side arrangements
Channel stuffing
Related parties transaction

Question 3

What are the 13 types of documents related to Revenue recognition, that can help having a great idea!

Answer 3

1. Credit approval form (related to AFDA)
2. Customer sales order
3. Open-order-report
   4.Shipping document(bill of lading)
4. Sales invoice
   6.Sales journal
5. Customer statement
6. Accounts Receivable Subsidiary Ledger
7. Aged Trial Balance of Accounts Receivable
8. Remittance Advice
   11.Cash Receipts Journal
   12.Credit Memorandum
9. Write-Off Authorization

Question 4

What is a credit approval form

Answer 4

Its a form, where that attests the investigation of the entity’s creditworthiness. (To avoid bad debt expense)

Question 5

What is a customer sales order

Answer 5

Contains the details of the type and quantity of
products or services ordered by the customer.
Indicates Validity of customer and ‘real’ sale

Question 6

What is an open order report

Answer 6

Report of all customer orders for which
processing has not been completed. Check if
Unmatched for Completeness!

Question 7

Shipping document (bill of lading)

Answer 7

bill of lading and contains information on the type of product shipped, the quantity shipped, and other relevant information. Proof of SALE! Critical Event! Useful for
Occurrence & Cutoff, Common carrier vs Company delivery

Question 8

Sales invoices

Answer 8

The document is used to bill the customer. This document contains information on the type of product or service, the quantity, the price, and the terms of trade. Measurement in $

Question 9

Sales Journal

Answer 9

Once a sales invoice has been issued, the sale needs to be recorded in the accounting records. The sales journal is used to record information about the sales transaction. Completeness

Question 10

Customer statement

Answer 10

This document is mailed to the customer and
contains details of all sales, cash receipts, and
credit memorandum transactions. Reminder to Customer, Valuation

Question 11

Accounts receivable subsidiary ledger

Answer 11

his ledger contains an account and the details of transactions for each customer. Tie-in to GL

Question 12

Aged Trial Balance of Accounts Receivable

Answer 12

This report summarizes all the customer balances in the accounts receivable subsidiary ledger. Each account is classified as current or placed into one of several past due categories. Delinquencies & Valuation

Question 13

Remittance Advice

Answer 13

This is usually the part of the customer’s bill that should be returned with the payment. Supports Cash Receipts Valuation

Question 14

Cash Receipts Journal

Answer 14

This journal is used to record the cash receipts of the entity. Sources of Cash Collections

Question 15

Credit Memorandum

Answer 15

This document is used to record credits for the return of goods by a customer. Negates a Sale!

Question 16

Write-Off Authorization

Answer 16

This document authorizes the write-off of an
uncollectible account receivable. Final approval is generally authorized by the treasurer. Bad Debt Write-offs

Question 17

Inherent risks factors of the revenue recognition process

Answer 17

1. Industry related factors: regulation, demand, pricing
2. Complexity and contentiousness of revenue recognition issues (Accounting standards)
3. Difficulty of auditing transactions and account balances (Volume, RPTs, FX)
4. Misstatements detected in prior audits

Question 18

What steps an auditor needs to take, when he needs to do a control risk assessment?

Answer 18

1. Understand and document the revenue process based on a reliance strategy
2. Plan and perform tests of controls on revenue transactions
3. Set and document the control risk for the revenue process

Question 19

What you plan a perform tests of controls, such tests includes…

Answer 19

1. Inquiry of client personnel
2. Inspection of documents and records
   3.Observations of the operation of the control
3. Walkthrough
4. Reperformance of the control activities

Question 20

What types of major material misstatements, (issues) should an auditor be concerned about? (issues related to Occurrence)

Answer 20

1. Sales to fictitious customers
2. Recording revenue when goods have not been shipped or services have not been performed.

Needs assurance, that all recorded revenue transaction are valid.

Question 21

The major assertions that need to be tested for revenue recognition related to revenue transaction:

Answer 21

• Occurrence
• Completeness
• Authorization
• Accuracy and accuracy
• Cutoff and classification

Question 22

The auditor is looking, for when mentioning completeness.

Answer 22

Auditors are concerned about is goods are shipped or services are performed and nor revenue is recognized.

Question 23

What test of controls concern completeness?

Answer 23

1. Accounting for numerical sequence of shipping
   documents and sales invoices,
2. Matching shipping documents with sales invoices,
3. Reconciling sales invoices to daily sales reports, and
4. Maintaining and reviewing the open-order file

Question 24

What issues, are auditors concern about, while thinking at the authorization and accuracy assertion.

Answer 24

Possible misstatements due to improper authorization
include shipping goods to, or performing services for,
customers who are bad credit risks and making sales
at unauthorized prices or terms.

Question 25

What test of control can be done for authorization and accuracy, of revenue transactions?

Question 26

Why should an auditor worry about revenu, testing for cutoff and classification?

Answer 26

Sales may be recorded in the wrong accounting period unless proper controls are in place. All shipping documents should be forwarded to the billing department daily

Question 27

What is a test of control, for revenue transactions concerning cutoff and classification?

Answer 27

Inquire, about the use of a chard of accounts and proper codes for recording transactions. It should provide adequate assurance about the proper classification of revenue transactions.

Question 28

Occurrence of cash receipts transactions

Answer 28

The possible misstatement that concerns the auditor when considering the occurrence assertion is that cash receipts are recorded but not deposited in the entity’s bank account.

Question 29

Completeness of cash receipts and authorization of discounts

Answer 29

- Cash or checks are stolen or lost before being recorded in the cash receipts records. - Proper segregation of duties and a lockbox system are strong controls relating to completeness - Controls in the accounting system and data analytics should ensure that management’s policies concerning cash discounts are followed

Question 30

Accuracy of Cash Transactions

Answer 30

- Wrong amount of cash could be record from the remittance advice, receipt could be incorrectly processed during data entry. - To minimize these types of errors, daily remittance reports should be reconciled to a control listing of remittance advices - The use of monthly customer statements also provides a check on posting to the correct customer account

Question 31

Cutoff and Classification of Cash Receipts Transactions

Answer 31

- If the entity uses a lockbox system or if cash is deposited daily in the bank, there is a small possibility of cash being recorded in the wrong accounting period - The auditor seldom has major concerns about cash receipts being recorded in the wrong financial statement account

Question 32

Test and controls - sales returns and allowance

Answer 32

- Not a material amount, credit memoranda used to process sales returns can be used to cover an unauthorized shipment or conceal cash - All credit memoranda should be authorized - Credit for returned goods, should be supported by a receiving document

Question 33

Auditing revenue, substantive procedures

Answer 33

1. Substantive analytical procedures: used to examine plausible relationships among revenue related accounts. 2. Tests of details: Focus on transactions, account balances, disclosures. Tests of details concentrate on the ending balance for AR and related accounts.

Question 34

What are examples of substantive analytical procedures (5 ratios)

Answer 34

1. Receivables turnover and days outstanding in accounts receivable 2. Aging categories on aged trial balance of accounts receivable 3. Bad-debts expense as a percent of revenue 4. Allowance for uncollectible accounts as a percent of accounts receivable or credit sales 5. Large customer account balances compared to last period

Question 35

What is the auditors main concern for the completeness assertion, and how to do it, for AR and related accounts?

Answer 35

The auditor’s primary concern is whether all accounts receivable have been included in the accounts receivable subsidiary ledger and the general ledger accounts receivable account - Reconciliation of the aged trial balance to the general ledger account should detect an omission of a receivable from either the subsidiary or general ledger

Question 36

Existence and rights and obligations for AR and related accounts

Answer 36

Existence is one of the more important assertions for accounts receivable because the auditor wants assurance that this account balance is not overstated through the inclusion of fictitious customer accounts or amounts. Confirmation is the major audit procedure used for testing this assertion The auditor must determine that all accounts receivables are owned by the entity.

Question 37

What does the auditor needs to verify related to accuracy, valuation and allocation for AR and related accounts?

Answer 37

- Accounts receivable should be shown on the balance sheet at net realizable value (gross amount less allowance for uncollectible accounts). - The auditor must verify the adequacy of the allowance for uncollectible accounts. The first step is to prepare an aged trial balance and discuss results with the credit manager. Next, a comparison with last year’s results should be examined.

Question 38

What does the auditor needs to verify related to classification for AR and related accounts?

Answer 38

1. Identifying and reclassifying any material credits contained in accounts receivable 2. Segregating short-term and long-term receivables 3. Ensuring that different types of receivables are properly classified

Question 39

What does the auditor needs to verify related to presentation for AR and related accounts?

Answer 39

- The auditor must ensure that all necessary disclosures are made - Most public accounting firms use some type of financial statement reporting checklist to ensure that all necessary disclosures are made for each account

Question 40

Explain the confirmation process - for accounts receivable

Answer 40

Confirmation is audit evidence that is a direct written response form from third parties about AR balance.

Question 41

Why would you omit confirmation?

Answer 41

- AR is immaterial - External confirmations would be ineffective - level of risk low, other substantive procedures address the risk

Question 42

What fctors Affecting the Reliability of A/R Confirmations

Answer 42

Type of confirmation request (positive versus negative) * Prior experience with the client or similar engagements (e.g., response rate, accuracy of returned confirmations, misstatements identified) * The intended respondent (competence, knowledge, ability, and objectivity

Question 43

What is a positive confirmation vs a negative confirmation

Answer 43

Positive: Requests that customers indicate whether they agree with the amount due to the client. A response is expected whether the customer agrees or disagrees with the balance indicated Negative: Requests that the customer respond only when they disagree with the amount due to the client. Negative confirmations are used when the client has many small account balances and control risk is assessed as low.

Question 44

When should you send a confirmation?

Answer 44

At an interim date or at year-end. The confirmation request should be sent soon after the end of the accounting period in order to maximize the response rate.