Professional Documents
Culture Documents
Revenue Recognition
FASB
(SFAC No. 5) requires that before revenue is recognized it must be realized and earned.
SECs SAB No. 101 requires the following criteria for revenue recognition:
The
Persuasive evidence of an arrangement exists. Delivery has occurred or services have been rendered. The seller's price to the buyer is fixed or determinable. Collectability is reasonably assured.
Revenue cycle transactions include all the processes ranging from the sale to shipping a product, billing the customer, and collecting cash
Receive payment
Consider inherent risks of material misstatement, including fraud risks. Consider internal control over receivables and revenue. Substantiate the existence of receivables and the occurrence of revenue transactions. Establish the completeness of receivables and revenue transactions.
Determine that the client has rights to recorded receivables. Establish the clerical accuracy of records and supporting schedules of receivables and revenue.
Determine the valuation of receivables and revenue is at appropriate net realizable values.
Determine that the presentation and disclosure of receivables and revenue are adequate
Separation of receivables into appropriate categories Adequate reporting of any receivables pledged as collateral Disclosure of related party sales and receivables.
entry (sales) Credit authorization Warehousing (maintaining inventory) Shipping Billing Cash receipts Accounts receivable General ledger
purchase order Sales order Bill of lading (shipping document) Invoice Control listing Credit memo
Hidden side letters that give customers unlimited right to return product
Record consignment sales as final sales Accelerated recognition of sales occurring after yearend Ship unfinished goods
10
Ship
Record
sales sales
Record
Segregation of duties Matching of sales invoices and shipping documents Clerical accuracy checks on invoices Credit approval for sales transactions Mailing of monthly statements
Recording unearned revenue Ethical environment created by top management Effective billing process (tied to shipping function) Effective controls for testing invoices, computer reconciliations
Early (late) recognition of revenue Ethical environment created by top management Effective cutoff procedures in shipping department
Substantive Tests
Substantive Tests
Audit Objectives
Obtain aged listing of receivables Clerical accuracy and reconcile to General Ledger Obtain analyses of Notes Receivables and related interest Inspect notes on hand and confirm those not on hand Existence, occurrence, and rights
Substantive Tests
Review the year-end cutoff of sales transactions
Audit Objectives
Existence, occurrence, and rights Completeness
Substantive Tests
Audit Objectives
Valuation Evaluate the propriety of clients accounting for transactions. Evaluate accounting estimates related to revenues. Determine the adequacy of allowance for uncollectible accounts. Ascertain the existence of pledged receivables. Investigate receivables from related parties. Evaluate financial statement presentation and disclosure. Presentation and disclosure