Channel: Edspira

Category: Education

Tags: revenue cycleauditing & attestationaudit cpa lecturesinternal controlcontrol activities internal controlauditing revenueaudit cpa examsegregation of dutiesaudit cpa reviewrevenue and collection cyclerevenue and collection cycle auditcontrol activitiesinternal controls for revenue

Description: Before you can test a client’s internal controls you first need to know which internal controls are in place. The auditor can identify the internal controls by asking the client’s employees to complete a questionnaire and by doing a walkthrough of the revenue and collection cycle. The walkthrough would involve following a sale from the initial customer purchase all the way through to the collection of the receivable. If the auditor notices an area where a misstatement might occur during the walkthrough, the auditor should ask: has the client designed a control that, if operating effectively, would prevent or detect a material misstatement? The auditor should also be sure to consider entity-level controls. For example: • Does the audit committee play an active role? • Does management closely monitor sales returns? • Does management closely monitor writeoffs of accounts receivable? • Does management inspect aged accounts receivable for issues with collectability? If the client has strong entity-level controls in place, this improves the control environment and reduces the risk of material misstatement. In addition to considering entity-level controls, the auditor should also identify the internal controls pertaining to each management assertion. For example, a 3-way match of a purchase order, a shipping document, and a sales invoice provides evidence about the occurrence of revenue and the existence of a receivable. Verifying the dates on these documents provides evidence about the cutoff assertion. The use of prenumbered documents provides evidence about the completeness assertion. Comparing these documents ensures that the correct type of goods and the correct quantity of goods have been shipped to the correct location and at the correct price and terms of trade. This provides evidence about the authorization and accuracy assertions. Segregation of duties is critical for the revenue and collection cycle. Remember that the revenue and collection cycle consists of 5 parts: 1. Receiving and processing customer orders 2. Approving credit 3. Delivering goods and services 4. Billing customers and managing accounts receivable 5. Collecting and depositing cash Different people or departments should be responsible for each of these 5 steps. Allowing one person to perform a combination of these activities increases the risk of fraud or other problems. — Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education accessible to all people. — SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS: • A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING • A 44-PAGE GUIDE TO U.S. TAXATION • A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS • MANY MORE FREE PDF GUIDES * eepurl.com/dIaa5z — GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT * edspira.thinkific.com — LISTEN TO THE SCHEME PODCAST * Apple Podcasts: podcasts.apple.com/us/podcast/scheme/id1522352725 * Spotify: open.spotify.com/show/4WaNTqVFxISHlgcSWNT1kc * Website: edspira.com/podcast-2 — GET TAX TIPS ON TIKTOK * tiktok.com/@prof_mclaughlin — ACCESS INDEX OF VIDEOS * edspira.com/index — CONNECT WITH EDSPIRA * Facebook: facebook.com/Edspira * Instagram: instagram.com/edspiradotcom * LinkedIn: linkedin.com/company/edspira — CONNECT WITH MICHAEL * Twitter: twitter.com/Prof_McLaughlin * LinkedIn: linkedin.com/in/prof-michael-mclaughlin — ABOUT EDSPIRA AND ITS CREATOR * edspira.com/about