AUDITING THE REVENUE CYCLE

REVENUE CYCLE AUDIT

OBJECTIVES, CONTROLS, AND TEST
OF CONTROLS
A. Input Controls
-Designed to ensure that transactions are valid, accurate,
and complete.
Input controls related to revenue cycle operations:
Credit Authorization Procedures only customer
transactions that meet the organizations credit standards
are valid and should be processed further
Testing Credit Procedures
Determine that effective procedures exists
Creating dummy accounts Test data or Integrated
Test Facility (ITF)
Performing substantive tests of details

 MANAGEMENT ASSERTIONS AND

REVENUE CYCLE AUDIT OBJECTIVES
Existence / Occurrence
VERIFY AR balance represents amounts
actually owed as of Balance Sheet date
Establish sales represents goods shipped
and/or services rendered during period of
financials
Completeness
Determine all amounts owed organization
are included in AR
VERIFY shipped goods, services rendered,
and/or returns and allowances for period
are included in financials
 MANAGEMENT ASSERTIONS AND
REVENUE CYCLE AUDIT OBJECTIVES
Accuracy
VERIFY revenue transactions are
accurately computed, based on correct
prices and quantities
Ensure AR subsidiary ledger, sales invoice
file, remittance file are mathematically
correct .. And agree with GL accounts
Rights & Obligations
Determine organization has legal right to
AR
VERIFY accounts sold or factored have
been removed from AR
 MANAGEMENT ASSERTIONS AND
REVENUE CYCLE AUDIT OBJECTIVES
Valuation or Allocation
Determine AR balance stated in net
realizable value
Establish allocation for uncollectible
accounts is appropriate
Presentation and Disclosure
VERIFY AR and revenues for period are
properly described and classified
 A. Input Control
Data Validation Controls to detect
transcription errors in transaction data
before they are processed
Testing Validation Controls
Testing the data editing controls
Reviewing error listings and error logs
Batch Controls to manage high volumes
of transaction data through a system
Testing Batch Controls
Reviewing transmittal records of batches processed
Reconciling transaction listings, error logs, and logs
of resubmitted records

 REVENUE CYCLE AUDIT OBJECTIVES,

CONTROLS, AND TEST OF CONTROLS

B. Process Controls
- are computerized procedures for file
updating and restricting access to data.

File Update Controls

Transaction Code Controls
Sequence Check Controls

- Tests of these controls provide the auditor

with evidence relating to the assertions of
existence, completeness, and accuracy.
 REVENUE CYCLE AUDIT OBJECTIVES,
CONTROLS, AND TEST OF CONTROLS

B. Access Controls
- Prevent and detect unauthorized
and illegal access to the firms assets.
- In the absence of controls, invoices
can be deleted, added, or falsified.
 REVENUE CYCLE AUDIT OBJECTIVES,
CONTROLS, AND TEST OF CONTROLS

C. Physical Controls
Segregation of Duties
Supervision
Independent Verification

- Inadequate segregation of duties and

the lack of effective supervision and
independent verification can result in
fraud and material errors.
 REVENUE CYCLE AUDIT OBJECTIVES,
CONTROLS, AND TEST OF CONTROLS

D. Output Controls
- Designed to ensure that information is not
lost, misdirected, or corrupted and that
system processes function as intended.

A/R Change Report

Transaction Logs
Transaction Listings
Log of Automatic Transactions
Unique Transaction Identifiers
Error Listing
SUBSTANTIVE TESTS OF
REVENUE CYCLE
ACCOUNTS
 SUBSTANTIVE TESTS OF REVENUE
CYCLE ACCOUNTS

Purpose : Determine the nature,

timing, and extent of substantive
tests using the auditors assessment
of inherent risk, unmitigated control
risk, materiality considerations, and
the need to conduct the audit in an
efficient manner.
 Audit Concern
Potential for overstatement of revenues and accounts receivable

Overstatement can result from material errors in the

processing of normal transactions that occur throughout the year.
Focus on large and unusual transactions at or near period end.

Specific Issues :
Recognizing revenues from sales transactions that DID NOT
OCCUR, or from sales transactions BEFORE they are realized
Failing to recognize period end cutoff points
Underestimating allowance for doubtful accounts
Shipping unsolicited products to customers in one period that are
returned in a subsequent period
Billing sales to the customer that are held by the seller
 Resolve
Test of Controls
-General
-Application
Integrated Test Facility (ITF)
-Positive results may reduce the degree of
substantive testing BUT no assurance about the
collectability of the accounts receivable.
- can provide assurance that an organizations credit
policy is being properly implemented BUT provides no
evidence that proper cutoff procedures were followed.
Substantive Tests
- Quality of internal controls bears on the nature and
extent of substantive tests determined to be necessary.
UNDERSTANDING THE DATA

The auditor must verify that he or she is

working with the correct version of the file
to be analyzed.
Most sequential files and relational database
tables can be directly read by the ACL.
Complex file structures may require
flattening before they can be analyzed.
The auditor must verify that the correct
version of the original file was used and that
all relevant records from the original were
transferred to the copy for analysis.
 File Structures
Customer File contains address and
credit information about customers
Sales Invoice File contains summary data
for each invoice.
Line Item File contains a record of every
product sold.
Inventory File contains quantity, price,
supplier, and warehouse location data for
each item of inventory.
Shipping Log File contains a record of all
sales orders shipped to customers.

File Preparation Procedures

Preliminary step : Each file needs to be defined.
Physical location specifies the name and
where it resides
Structure in terms of length of each field
and the data type contained in each field
File definition is saved under a unique name.
All future file access is accomplished by simply
selecting the file definition from an ACL menu.
ACL automatically locates the file and presents it
on screen.
 TESTING THE ACCURACY AND
COMPLETENESS ASSERTIONS
ANALYTICAL REVIEW of account balances
often precedes substantive tests of details.
Provides the auditor with an overall
perspective for trends in sales, cash receipts,
sales returns, and accounts receivable.
Does not necessarily require computer
technology.
Provides assurance that transactions and
accounts are reasonably stated and complete
May permit the auditor to reduce substantive
tests of details.
 Substantive tests that can be
performed using ACL
REVIEW SALES INVOICES FOR
UNUSUAL TRENDS AND
EXCEPTIONS
Scanning data files for unusual
transactions and account balances
ACLs stratify feature groups data
into predetermined intervals and
counts the number of records that
fall into each interval.
 Substantive tests that can be
performed using ACL
REVIEW SALES INVOICE AND SHIPPING
LOG FILES FOR MISSING AND
DUPLICATE ITEMS
this may be evidence of over- or
understated sales and accounts
receivable
ACL is capable of testing a designated
field for out-of-sequence records, gaps
in sequence numbers, and duplicates
for the entire file
 Substantive tests that can be
performed using ACL
REVIEW LINE ITEM AND INVENTORY
FILE FOR SALES PROCE ACCURACY
-pricing inconsistency in such setting
may indicate a computer program
error or the use of obsolete pricing
data
- Using the ACL features, the auditor
can calculate the total price variance
and make a determination as to its
materiality, if material, it is a need to
be pursued with the management
 Substantive tests that can be
performed using ACL
TESTING FOR UNMATCHED RECORDS
Possible causes
1. value of the Item Number is incorrect
and does not match the Inventory
record
2. presence of Inventory records in the
unmatched file means that there is no
corresponding records in the Line Item
file
 Testing the Existence Assertions

Confirmation of Accounts Receivables

Auditors should request confirmations
of accounts receivable except in the
following three situations:
(1) accounts receivable are immaterial;
(2) based on a review of internal
controls, the auditor has assessed
control risk to be low; or
(3) the confirmation process will be
ineffective.
 3 Stages of Confirmation
Process
1. selecting the accounts to confirm
>Consolidated Invoices
>Joint Files
Select a Sample of Accounts
-random (record) sampling
- monetary unit sampling (MUS)
 2. preparing confirmation
requests

2 Types of Confirmation
a. Positive Confirmation
b. Negative Confirmation
3. evaluating and controlling the responses
 Testing the
Allocation/Valuation Assertion
Auditors objective:
to corroborate or refute that accounts receivable
are stated at net realizable value

Aging Accounts Receivable

Key issues for auditors to resolve:

-Whether allowance for doubtful accounts
reasonable compared to prior years and based
on composition of AR portfolio
-Review past-due balances