The Revenue System Flashcards
Revenue
Normally the largest item in the financial statements. Material by nature.
Revenue is income generated through ordinary activities id the business.
Why would revenue be overstated?
- Company wants to achieve profit targets (to raise share price)
- Invalid sales transactions included
- Cut-off (sales of early 2021 included in 2020 statements)
- Long term contracts (timing of recognition)
Why would revenue by understated?
- Company wants to reduce profit (avoid tax)
- Fraud
- Cut-off as if stated in 2020, then 2021 will be understated.
- Long term contracts (timing of recognition)
What is the revenue cycle?
1) receiving a customer order
2) Approving credit for a sale (B2B)
3) Determining whether goods are available in inventory
4) Delivering the goods
5) Invoice the customer
6) Collecting cash
7) Recognising effects of revenue process on other related accounts
What are the Key controls of revenue?
- Authorisation
- Matching
- Sequence checking
- Segregation of duties
What are the revenue systems and their documents process
Ordering - Sales order form
Delivering - Good delivery note
Invoicing - Sales invoice
Allowances/Returns - Sales credit note
What to do with revenue risks that may occur?
- Identify risks and what can go wrong (deficiencies)?
- Control objectives, what to do in order to prevent risks occurring
- Controls, put in place by the company to achieve the objectives
- Test of controls, carried out by the auditor to ensure the controls are operating effectively.
What is an example of an ordering risk?
orders may be taken from consumers who are unlikely to pay for a long time. - risk
Customers are encouraged to pay promptly. - control objective
authorisation of credit terms to customers - controls
Check that orders are only accepted from consumers that are within credit terms and limits. - test of controls
What is an example of an ordering risk?
Orders may not be recorded therefore not fulfilled and customers may be lost due to this. - risk
order fulfilled - control objective
authorisation in changes in customer data. Sequential numbering and subsequent checking of sequence for order completeness. - controls
check that customer orders are being matched with production orders and despatch notes - test of controls
What is an example of despatch/delivery risks?
- Goods despatched but delivery not recorded so they are lost to the business - (risk)
- All despatches recorded (control objective)
- All goods dispatched are recorded on a GDN (controls)
- Sequence checks on GDNs and checks on order forms (Test of controls)
What is an example of despatch/delivery risk?
- Invoices may be raised in error (therefore no delivery) resulting in customer dissatisfaction. (risk)
- All invoices raised relate to goods and serviced supplied by the business (control objective)
- Invoice only raised on receipt of match order and signed GDN (Controls)
- Check for authorisation, and check details have been verified. (Test of controls)
What is an example of a recording risk?
- Invoiced sales might not be recorded properly (risk)
- All sales invoiced are recorded in the nominal and receivables ledger (control objective)
- Segregation of duties such as recording sales, customer accounts and preparing statements (controls)
- Check entries with invoices and credit notes respectively. Check any additions (test of controls)
What is an example of cash collection risk?
- Cash may be lost so might cheques that are received (risk).
- keep money safe (control objective)
- comparison of cash received to amount banked, cash stored in safe, independent surprise cash counts (controls)
- Examine documentary that these are taken place, observe procedures and inspect sign off (Test of controls)
How to best answer risks to revenue system ques?
Although sequence checks and matching to records are important look at wider opinion.
Who has the responsibility?
RISKS + CONTROL OBJECTIVES + CONTROLS = management responsibility (the client)
TEST OF CONTROLS = auditor
