Learning Check Chapter 14

CHAPTER 14
AUDITING
THE
REVENUE CYCLE
Learning
Check
14-1.
a.
The revenue cycle includes the activities involved in the exchange

of goods and services with customers and the realization of the
revenue in cash.
b.
The classes of transactions in this cycle for a merchandising

company are sales, sales adjustments, and cash receipts. The
primary
accounts
affected by these transactions
are sales,
accounts receivable, cost of sales, inventory, cash, sales discounts,

sales returns and allowances, bad debts expense, and allowance for
uncollectable accounts
14-2.
a.
Specific audit objectives for the revenue cycle are derived from the
five categories of management's financial statement assertions.
b.
Specific audit objectives for credit sales transactions include the
following:
Specific Audit Objectives
Transaction Objectives
Occurrence. Recorded sales transactions represent goods shipped
or services provided during the period.
Recorded cash receipt transactions represent cash received during
the period.
Solutions Manual to Modern Auditing: Copyright
2005, John Wiley and Sons, Inc.
14-1
Recorded sales adjustment transactions during the period represent

authorized discounts, returns and allowances, and uncollectable
accounts.
Completeness. All sales cash receipts and sales adjustments made
during the period were recorded.
Accuracy. All sales and cash receipts and sales adjustments are
accurately valued using GAAP and correctly journalized, summarized
and posted.
Cutoff. All sales, cash receipts and sales adjustments have been
recorded in the correct accounting period.
Classification. All sales, cash receipts, and sales adjustments have
been recorded in the proper accounts.
Balance Objectives
Existence. Accounts receivable representing amounts owed by
customers exists at the balance sheet date.
Completeness.
Accounts receivable include
all
claims
on
customers at the balance sheet date.

Rights and Obligations. Accounts receivable at the balance sheet
date represent legal claims of the entity on customers for payment.
Valuation and Allocation. Accounts receivable represents gross
claims on customers at the balance sheet date and agrees with the
sum of the accounts receivable subsidiary ledger. The allowance for
uncollectable accounts represents a reasonable estimate of the
difference between gross receivables and their net realizable value.
Disclosure Objectives
Occurrence and Rights and Obligations. Disclosed revenue
cycle events and transactions have occurred and pertain to the
entity.
Completeness. All revenue cycle disclosures that should have been
included in the financial statements have been included.
Understandability.
Revenue cycle information is appropriately
presented and information in disclosures is understandable to users.
Accuracy and Valuation. Revenue cycle information is disclosed
accurately and at appropriate amounts.
14-3.
Following are a few examples of differences between how the auditor

might use the knowledge of the entity and its environment for a
computer company v. a hotel.
14-2
a.
Certain balance sheet accounts like accounts receivable and

inventories are going to be very significant for the computer
manufacturer, but relatively immaterial for the hotel.
The
computer company is also likely to have a higher ratio of sales to

fixed assets, or sale to total assets, than the hotel.
b.
The computer company auditor will have significant issues

associated with the risk of misstatement with respect to the
existence of receivables and inventories that are not present for
the hotel. The computer company auditor will also have to address
valuation and allocation issues associated with the collectability of
receivables and lower of cost or market of inventories that are
insignificant for the hotel.
The hotel will have a potential risk of
material misstatement in terms of how it accounts for revenues

from properties that it manages for others, as opposed to
properties that it owns.
14-4. Factors that might motivate management to deliberately misstate
revenue cycle assertions include:
Pressures
to
overstate
revenues
in
order
to
report
achieving
announced revenue or profitability targets or industry norms that were

not achieved in reality owing to such factors as global, national, or
regional
economic
conditions,
the
impact
of
technological
developments on the entity's competitiveness, or poor management.
Pressures to overstate cash and gross receivables or understate the

allowance for doubtful accounts in order to report a higher level of
working capital in the face of liquidity problems or going concern
doubts.
14-3
Factors that might contribute to unintentional misstatements in revenue

cycle assertions include:
The volume of sales, cash receipts, and sales adjustments transactions

is often high, resulting in numerous opportunities for errors to occur.
The timing and amount of revenue to be recognized may be

contentious owing to factors such as ambiguous accounting standards,
the need to make estimates, the complexity of the calculations
involved, and purchasers' rights of return.
14-5. a.
Following are example analytical procedures that the auditor might

use
to
estimate
total
revenue
for
household
appliance
manufacturer and for an airline.

Industry
Household Appliance Mfg.
Possible Analytical Procedures

Use past ratio of net sales to
capacity
with
adjustments
for
capacity changes.
Use a combination of past ratios of

market share with adjustments of
current changes in market share.
Requires knowledge of the total
Airline
market size in the industry.

Estimate
net
revenues
information
on
utilization
using
of
capacity (airline seat miles) and

average revenue per seat.
b.
Two analytical procedures that the auditor might use to estimate

gross margin for company might include.
14-4
Analytic Procedure
Audit Significance
Compare historical trends Companies with commanding market
in market share and gross shares often are able to obtain larger
margin
with
current gross margins.
unaudited data.
Evaluate the percentage Companies with a high proportion of
of revenues coming from revenues from new products may earn
new products.
premium gross margins due to the

ability to innovate.
c.
Two analytical procedures that the auditor might use to estimate

net receivables and the allowance for doubtful accounts for
company might include.
Analytic Procedure
Audit Significance
Accounts receivable turn Understanding a companys history of
days
accounts and sales volume can assist

the
auditor
in
evaluating
net
receivables and the adequacy of the

Evaluate
history
the
of
allowance for doubtful accounts.

entities This procedure is primarily related to
uncollectable the adequacy of the allowance for
accounts expense to net uncollectable accounts.

credit
sales,
The above
with history of accounts receivable turn
adjustment for economic days

conditions
would
evaluating
be
most
estimating
useful
for
gross
receivables given sales.

14-6. Several control environment factors and their applicability to revenue
cycle assertions are:
14-5
Integrity
and
ethical
values
reduction
of
risk
of
overstatement of revenues and receivables by eliminating

incentives to dishonest reporting.
Commitment to competence - by chief financial officers and
accounting personnel.
Management's
philosophy
and
operating
style
conservatism in developing such accounting estimates as

the allowance for uncollectable accounts and allowance for
sales returns.
Human
resource
policies
and
practices
bonding
of
employees who handle cash

14.7. The following table summarizes the functions that apply to credit sales
transactions, the department that performs the functions, and the
principal documents or records produced in performing the function.
Department
that Principal
documents
and
produced
in
Function
performs function
records
Initiating
Sales department
performing the function.

Documents
credit sales
Customer Order
Credit department
Sales Order
Computer Files and Records
Customer Master File (with credit
information)
and
Accounts
Receivable Master File.

Perpetual Inventory
Authorized Price List
Open Order File
14-6
Department
Function
that Principal
performs function
records
documents
and
produced
in
performing the function.

Delivering
good
Warehousing
and Documents
and shipping department Shipping documents
services
for goods.
Reports of unfilled orders and

back orders
Line
operating
departments
for Computer Files and Records
services.
Open Order File

Perpetual Inventory
Recording
Accounting (Billing)
sales
Shipping File
Documents
Sales Invoice
Sales Reports and Sales Journal
Various Exception Reports
Monthly Customer Statements
Computer Files and Records
Sales Transaction File
Accounts Receivable Master File
14-8.
In order to assess control risk as low based on programmed control

procedures the auditor should test the following.
Control
Programmed
procedures
Importance to Control Risk Assessment

control If a programmed control procedure in critical
to a low control risk assessment then the
auditor should directly test the control
procedure.
Computer general control In order to obtain assurance that the
14-7
procedures
programmed control procedure functions

effectively throughout the period the auditor
also needs to these the effectiveness of
computer general control procedures.
follow-up Programmed
controls
usually
report
Manual
procedures.
exceptions
control.
noted
when
performing
the
As a result auditors also need to
test the effectiveness of manual controls

that follow-up on reported exceptions.
14-9.
The following tables describes programmed controls for a typical

manufacturing company.
Potential
Programmed Control
Misstatement
a. Sales invoices The
may
not
Data)
computer Submit test data for a
be compares
recorded.
CAATs (Assuming Test
entries
in transaction
the sales journal with shipping

underlying
has
information,
shipping both with and without a
information.
shipping
that
All supporting sales invoice.

documents
must be matched with

b. Sales
a sales invoice.
invoice The
computer Submit
may
c.
test
data
with
be compares dates on the dates on sales invoices
recorded in the sales
invoice
wrong
dates
on
accounting
documents.
with that both do and do not
shipping match
with
dates
on
related shipping files.
period.
A
fictitious The computer will not Submit
test
data
with
sales invoice, or prepare a sale invoice sales invoice information

a
sales without
transaction
for information
underlying that both is and is not

on supported by underlying
14-8
Potential
Programmed Control
Misstatement
which revenue shipping files.

Data)
shipping information.
should not be
recognized,
is
recorded.
d. Sales are made The computer searches Submit test data for sales
without
credit a field for appropriate orders that both are and
approval.
credit
authorization are
before
an
order
placed
on
an
not
supported
is appropriate
by
credit
open authorization.
order file.
e. A sales invoice The computer matches Submit test data for sales
has
incorrect quantities on a sales invoices that both do and
quantities
or invoices
prices.
with do not match underlying
underlying
shipping shipping information and
information
and authorized price lists.
matches prices with an

f.
authorized price list.

invoices The computer checks Submit
Sales
may
not
be run-to-run
totals
test
of batches
data
that
for
with
posted or may beginning
accounts complete and incomplete
not
balances, data
be receivable
journalized
the
the
terms
of
ending
receivable balances.
invoices The computer matches Submit
may be posted customer

to
in
plus sales transactions, completed transactions.

with
g. Sales
sets
test
information underlying
data
with
information
wrong on the sales invoice that both does and does
customers
with
the
master not
match
with
accounts.
customer file, the sales information on previously

order, and the shipping created sales order and
14-9
Potential
Programmed Control
documents.
Data)
shipping files.
Misstatement
14-10.
A common management control involves having managers with
responsibility for sales to review daily or weekly sales reports to assess

the reasonableness of recorded sales.
Further management responsible
for warehousing and shipping should review daily or weekly sales and
inventory movement reports to assess the reasonableness of recorded
sales and inventory removed from the perpetual inventory.
14-11.
The sub-functions involved in cash receipts include (1) receiving
cash receipts, (2) depositing cash in bank, and (3) recording the cash
receipts.
14-12. a.
Two important controls pertaining to cash sales and the transaction

class audit objectives to which they relate are:
The customer's expectation of a printed receipt and supervisory

surveillance of over the counter sales transactions helps to
ensure that all cash sales are processed through the cash
registers or terminals - completeness.
Independent check by supervisor on the accuracy of cash count

sheets, and verification of agreement of cash on hand with
totals printed by a cash register or terminal - existence or
occurrence and valuation or allocation.
b.
Two important controls pertaining to the initial handling of mail

receipts are (1) immediate restrictive endorsement of checks
received and (2) preparation of a multi-copy listing (prelist) of mail
receipts.
14-10
14-13. a.
A lockbox is a post office box that is controlled by the company's

bank. The bank picks up the mail daily, credits the company for the
cash, and sends the remittance advices to the company for use in
updating accounts receivable. This system eliminates the risk of
diversion of the receipts by company employees and failure to
record the receipts.
b.
Depositing receipts intact daily means that all receipts are

deposited; that is, cash disbursements should not be made out of
undeposited receipts. This control reduces the risk that receipts will
not be recorded (completeness), and the resulting bank deposit
record establishes the existence or occurrence of the transactions.
14-14.
Four controls that can aid in preventing or detecting errors or
irregularities
in
recording
cash
receipts are summarized below along with potential tests of controls:

Control
Independent
Test of Control
of Inspect a sample
check
of
daily
cash
agreement of validated deposit summaries and examine evidence of

slip with daily cash summary.
agreement with validated deposit slip
by responsible employee.
Computer check of information Use CAATs to test computer matching
included in the cash receipts of
information
from
cash
receipts
journal with information from journal with electronic prelist.

prelist.
follow-up
on
how
exceptions
Also
are
reported and examine evidence or

correction
Preparation
independent
of
of
errors
reported
on
exception reports.
periodic Examine a sample of periodic bank
bank reconciliations.
reconciliations.
bank
Make inquiries about
reconciliation
procedures
and
14-11
test accuracy on a sample basis.

Mailing of monthly statements Observe the mailing of monthly
to customers.
statements
to
customers.
Make
inquiries about procedures to follow-up

on issues raised by customers, and
examine reports or other evidence of
follow-up.
14-15. a.
The functions pertaining to sales adjustments transactions are:

granting cash discounts; granting sales returns and allowances; and
determining uncollectable accounts.
b.
The
following
three
types
of
controls
pertaining
to
sales
adjustments transactions have as their common focus establishing

the validity, or existence of occurrence, of such transactions:
Proper authorization of all sales adjustments transactions.
The use of appropriate documents and records, particularly the

use of an approved credit memo for granting credit for returned
or damaged goods, and an approved write-off authorization
memo for writing off uncollectable customer accounts.
Segregation
of
duties
for
authorizing
sales
adjustment
transactions and handling and recording cash receipts.

14-16. a.
The accounts receivable balance is a function of the transactions

that are posted to the account, namely credit sales, cash receipts,
and sales adjustments. A sound system of internal controls over
these three transaction cycles that ensure the completeness and
accuracy
of
these
transactions,
should
also
ensure
the
completeness and accuracy of account receivable.
14-12
b.
The primary control over the balance involves sending monthly

statements to customers and having an independent function to
receive and follow-up on any issues raised by customers.
c.
The rights and obligations assertion for accounts receivable

involves selling, or factoring, cash receipts.
If an entity sells its
receivables, it should keep a documentary record of the receivables

that have been sold or pledged, and have a process for following up
on collection of those receivables and the reduction of the related
liability to the factoring agent.
These records should be compared
with monthly statements received from a bank or factoring agent.

d.
Public companies normally control establish controls over the

presentation and disclosure assertion and related audit objectives
through an effective and independent disclosure committee. The
disclosure
committee
should
have
individuals
who
are
knowledgeable about GAAP and the transactions being processed.

14-17. The following table provides example controls and tests of controls for
each assertion (and transaction level audit objective) related to credit
sales and cash receipts.
Examples emphasize programmed control
procedures where appropriate. Student should note that tests of controls

should also emphasize testing computer general controls, observing
exception reports, and testing manual follow-up of items that appear on
exception reports.
Credit Sales
Assertion
(Audit
Control
Objective)
Existence and Occurrence
Computer
(Occurrence)
invoice
Test of Controls
matches
sales
information
with
underlying
shipping
Submit test data where invoice

data
does
not
match
with
underlying shipping information.
14-13
Completeness
information.
Computer prints a report of all
Submit test data with shipments
(Completeness)
goods shipped but not billed.
that have not been billed to test

accuracy of report of all good
and
Comparison of invoice date
shipped but not billed.

Submit test data with shipments
with the accounting period
in one period and billing in the
Completeness (Cutoff)
Valuation and Allocation
when goods were shipped.
subsequent period.
Submit test data
(Accuracy)
prices with authorized price
prices that do not match the
list and sales order.
authorized price list or sales order.
Computer matches customer
Submit test data the customer
number on sales invoice with
information on the sales invoice
customer number on sales
does not match the underlying
Existence
Occurrence
Presentation
and
Disclosure (Classification)
Computer
matches
sales
order.
Rights and Obligations
with
invoice
its
sales order.
Observe
and
receivables, it should keep
procedures
for
documenting
a documentary record of
receivables
that
have
the receivables that have
factored or sold.
If
an
entity
sells
reperform
been
been sold and it should

compare that record with
monthly
statements
received from a factoring

company.
Cash Receipts
Assertion
(Audit
Control
Test of Controls
Objective)
Existence and Occurrence
Independent
(Occurrence)
agreement
checks
of
with
check
of
cash
and
cash
count
Completeness
sheets and prelist.

Independent
check
(Completeness)
agreement
checks
of
with
cash
cash
sheets and prelist.
of
and
count
Observe and reperform manual

controls
to
check
independent
check of the prelist with the cash

receipts journal.
controls
to
check
independent

receipts journal.
14-14
Existence
and
Occurrence
Preparation
of
periodic
independent
bank
Completeness (Cutoff)
Valuation and Allocation
reconciliations.
Independent
check
(Accuracy)
agreement
checks
Presentation
and
Disclosure (Classification)
of
with
cash
cash
of
and
Observe and test the accuracy of

independent bank reconciliations.
controls
to
check
independent
count
sheets and prelist.

Mailing of statements to
receipts journal.
Make inquiries about mailing of
customers.
monthly statements to customers.

Observe
notes and
procedures
used to follow-up upon questions

Rights and Obligations
If
an
entity
sells
its
raised by customers.
Observe
and
reperform
receivables, it should keep
procedures
for
documenting
a documentary record of
receivables
that
have
the receivables that have
factored or sold.
been
been sold and it should

compare that record with
monthly
statements
received from a factoring

company.
14-18. a.
The transaction classes that should be considered in assessing

control risk for accounts receivable assertions are: credit sales,
cash receipts, and sales adjustments.
b.
In assessing control risk for the existence or occurrence account

balance assertion for accounts receivable, the following transaction
class control risk assessments should be considered:
Existence or occurrence for sales transactions that increase

accounts receivable.
Completeness
for
cash
receipts
and
sales
adjustments
transactions that decrease accounts receivable.
14-15
c.
A revised acceptable level of detection risk for tests of details and a

revised level of substantive tests must be determined for an
assertion
when
the
relevant
final
or
actual
inherent
risk
assessments, control risk assessments, and analytical procedure

risk assessments, differ from the planned assessed levels.
14-16
14-19.
The following table explains some example preliminary audit
strategies for each financial statement assertion in the context of the

audit risk model.
Assertion
Inherent
Control Risk
Analytic
Test of Details Risk
Existence
Risk
Maximum
Low
Procedures Risk
Moderate to high
Moderate which will allow for
and
due
internal
depending
on
smaller
Occurrence
revenue
controls over
reliability
of
changing
recognition
the
expectation
confirmations of receivables. It
problems.
occurrence of
model.
will also reduce the extent of
to
sales
Completenes
Moderate.
Not
and
Obligations
the
sizes
and
timing
of
cutoff tests.
Moderate to high which will
internal
depending
on
allow for smaller sample sizes
significant
controls over
reliability
of
and changing the timing of
inherent
the
expectation
confirmations of receivables. It
risk.
occurrence of
model.
will also reduce the extent of
Moderate to
strong.
Moderate
high
if
sample
Moderate to high
are
Low: Consider confirming with
high
depending
on
factoring agent and search for
depending
depending on
reliability
of
large unusual cash receipts.
on
internal
expectation
controls.
model.
the
ability
to
to
cutoff tests.
Moderate to high
entitys
However,
generate
control
operating
more
cash flow.
nonroutine
Valuation and
High
Allocation
maximum
due
or
to
subjective
nature
Presentation
are
strong.
Low
sales
Rights
if
of
are
than routine.
Moderate to
Moderate to high
The
high
depending
on
accuracy
depending on
reliability
of
gross value with confirmation.
internal
expectation
The auditor should consider
controls over
model.
extensive
allowance.
collection
of
Inherent risk
receivables.
Moderate to
auditor
can
of
test
the
receivables
tests
of
at
the
allowance after year-end.

Maximum:
Maximum to High.
It is often
14-17
and
is
Disclosure
high
usually
maximum.
14-20.
or
high
Analytical
depending on
procedures
internal
not
controls over
testing
disclosures.
disclosures.
directed
cost effective to substantively

are
at
test disclosures which are not

complex for receivables.
In vouching recorded accounts receivable transactions to supporting
documentation, a sample of debits to customers' accounts is compared

to data on supporting sales invoices and matching shipping documents,
sales orders, and customer orders. The evidence obtained pertains
primarily to specific audit objectives derived from the existence or
occurrence, rights and obligations, and valuation or allocation assertions
for accounts receivable.
14-21.
Both the sales cutoff test and the cash receipts cutoff test pertain
to accounts receivable. The sales cutoff test involves:
Examining shipping documents for several days before and after the
cutoff date to determine the date and terms of shipment.
Tracing shipping documents to sales and inventory records to establish

that the entries were made in the correct accounting period.
Inspecting invoices for a period of time before and after the cutoff
date to ascertain the validity and propriety of the shipments and
corresponding entries.
Inquiring of management about any direct shipments by outside

suppliers to customers and determining the appropriateness of related
entries.
In performing a cash receipts cutoff test, the auditor may be present at

the balance sheet date to personally observe the promptness of the
cutoff. In particular, the auditor determines that all collections received
prior to the close of business are included in cash on hand or in deposits
14-18
in transit and are credited to accounts receivable. Alternatively, the

auditor may review the daily cash summary and validated deposit slip for
the last day of the year.
Both cutoff tests relate to the occurrence and completeness audit
objectives for accounts receivable.
14-22. a.
It may not be necessary to confirm accounts receivable when:
The balance is immaterial to the financial statements.
The use of confirmations would be ineffective as an audit

procedure.
The auditor's combined assessment of inherent risk and control

risk is low, and that assessment, made in conjunction with the
evidence expected to be provided by analytical procedures or
other substantive tests of details, is sufficient to reduce audit
risk to an acceptably low level for the applicable financial
statement assertions.
b.
Factors to be considered in choosing the form of confirmation

request are (1) the acceptable level of detection risk and (2) the
composition of the customer balances. The positive form is used
when detection risk is low or individual customer balances are
relatively large. The negative form should be used only when all
three of the following conditions apply:
The acceptable level of detection risk for the related assertions

is moderate or high.
A large number of small balances is involved.
The auditor has no reason to believe that the recipients of the

requests are unlikely to give them consideration.
14-19
c.
When no response is received after the second or third positive

confirmation request to a customer, the auditor should apply such
alternative procedures as (1) examining subsequent collections and
(2) vouching open invoices comprising the customer's balance.
Alternate procedures may be omitted when both of the following
conditions apply:
There
are
no
unusual
qualitative
factors
or
systematic
characteristics related to the nonresponses, such as that all

nonresponses pertain to year-end transactions.
The nonresponses, projected as 100% misstatements to the

population and added to the sum of all other unadjusted
differences, would not affect the auditor's decision about
whether the financial statements are materially misstated
14-23. a.
The aged trial balance is used primarily in assessing the adequacy

of the allowance for uncollectable accounts.
b.
Procedures applied to the aged trial balance include (1) footing and
crossfooting the aged trial balance and comparing the total to the
general ledger balance for accounts receivable and (2) testing the
aging of the amounts shown in the aging categories by examining
supporting documentation such as dated sales invoices.
c.
After testing the accuracy of the aged trial balance the auditor
should perform the following procedures to draw a conclusion about
the fair presentation of the allowance for doubtful accounts.
Examine past due accounts for evidence of collectability such as

correspondence with customers and outside collection agencies,
credit reports, and customers financial statements.
14-20
Discuss collectability of accounts with appropriate management

personnel.
Evaluated managements process for estimated the allowance

for doubtful accounts using hindsight.
Evaluate the adequacy of the allowance given information about

industry trends, aging trends, and collection history for specific
customers.
d.
Hindsight allows auditors to evaluate the reasonableness of

managements process for estimating the allowance for doubtful
accounts. The reliability of managements process for developing
this accounting estimate can be gauged by evaluating estimates in
prior periods and the degree to which those estimates accurately
estimated subsequent uncollectable accounts.
14-24.
GAAP disclosure for accounts receivable include:

Disclosure
of
receivables
from
employees,
officers,
affiliated
companies and other related parties.
Appropriate classification of material credit balances.
Appropriate classification of current and noncurrent receivables.
Disclosure of pledging, assigning, or factoring receivables.
14-21

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CHAPTER 14

The revenue cycle includes the activities involved in the exchange

The classes of transactions in this cycle for a merchandising

affected by these transactions

accounts receivable, cost of sales, inventory, cash, sales discounts,

Specific audit objectives for credit sales transactions include the

Solutions Manual to Modern Auditing: Copyright

2005, John Wiley and Sons, Inc.

Recorded sales adjustment transactions during the period represent

customers at the balance sheet date.

Following are a few examples of differences between how the auditor

Solutions Manual to Modern Auditing: Copyright

2005, John Wiley and Sons, Inc.

Certain balance sheet accounts like accounts receivable and

computer company is also likely to have a higher ratio of sales to

The computer company auditor will have significant issues

The hotel will have a potential risk of

material misstatement in terms of how it accounts for revenues

announced revenue or profitability targets or industry norms that were

developments on the entity's competitiveness, or poor management.

Pressures to overstate cash and gross receivables or understate the

Solutions Manual to Modern Auditing: Copyright

2005, John Wiley and Sons, Inc.

Factors that might contribute to unintentional misstatements in revenue

The volume of sales, cash receipts, and sales adjustments transactions

The timing and amount of revenue to be recognized may be

Following are example analytical procedures that the auditor might

manufacturer and for an airline.

Possible Analytical Procedures

Use a combination of past ratios of

market size in the industry.

capacity (airline seat miles) and

Two analytical procedures that the auditor might use to estimate

Solutions Manual to Modern Auditing: Copyright

2005, John Wiley and Sons, Inc.

current gross margins.

premium gross margins due to the

Two analytical procedures that the auditor might use to estimate

accounts and sales volume can assist

receivables and the adequacy of the

allowance for doubtful accounts.

uncollectable the adequacy of the allowance for

accounts expense to net uncollectable accounts.

with history of accounts receivable turn

adjustment for economic days

receivables given sales.

Solutions Manual to Modern Auditing: Copyright

2005, John Wiley and Sons, Inc.

overstatement of revenues and receivables by eliminating

conservatism in developing such accounting estimates as

employees who handle cash

performing the function.

Receivable Master File.

2005, John Wiley and Sons, Inc.

performing the function.

and shipping department Shipping documents

Reports of unfilled orders and

for Computer Files and Records

Open Order File

In order to assess control risk as low based on programmed control

Importance to Control Risk Assessment

2005, John Wiley and Sons, Inc.

programmed control procedure functions

As a result auditors also need to