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Modern Auditing:Assurance Services and the Integrity of
Financial Reporting, 8th EditionWilliam C. BoyntonCalifornia
Polytechnic State University at San Luis ObispoRaymond N.
JohnsonPortland State UniversityChapter 14 Auditing the Revenue
Cycle
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Chapter Overview
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The Revenue Cycle
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Develop Audit Objectives
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Inherent Risk, Including the Risk of FraudManagement
Misstatement of RevenueOverstate revenuesOverstate cash and gross
receivablesUnderstate allowance for doubtful accounts
Other Misstatement FactorsOpportunities for
errorTimingMisclassificationAdjustment transactions
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Analytical Procedures
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Consideration of Internal Control ComponentsControl
Environment
Risk Assessment
Information and Communication
Monitoring
Initial Assessments of Control Risk
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Study BreakThe revenue cycle includes all of the following
transactions, except:Credit SalesCash ReceiptInventory
PurchaseSales Returns and Allowances
C. Inventory Purchase
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Study BreakThis internal control component should provide
management with feedback as to whether internal controls pertaining
to revenue cycle transactions and balances are operating as
intended.MonitoringInitial Assessments of Control RiskInformation
and CommunicationControl Environment
A. Monitoring
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Control Activities for Credit Sales TransactionsCredit Sales
OrdersOver-the-CounterMail OrderInternet
Computerized Accounting SystemGeneral ControlsApplication
Controls
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Common Documents and RecordsCustomer Order
Sales Order
Shipping DocumentBill of LadingPacking Slip
Sales Invoice
Authorized Price List
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Common Documents and RecordsSales Transactions File
Sales Journal
Customer Master File
Accounts Receivable Master FileAccounts receivable subsidiary
ledger
Customer Monthly Statement
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Function and Control ActivitiesAuthorizing SalesAccepting
Customer OrdersApproving Credit
Delivery of Goods and ServicesFilling Sales OrdersShipping Sales
Orders
Recording Sales
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System Flowchart Credit Sales
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System Flowchart Credit Sales
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System Flowchart Credit Sales
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Study BreakThis document is a journal listing of the completed
sales transactions.Sales invoiceSales transactions filesAuthorized
price listSales journal
D. Sales journal
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Study BreakThis document shows the description, quantity, and
other data pertaining to a customer order.Customer orderSales
orderShipping documentSales invoice
B. Sales order
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Cash Receipts Transactions Common Documents and
RecordsRemittance Advice
Prelist
Cash Count Sheets
Daily Cash Summary
Validated Deposit Slip
Cash Receipts Transactions File
Cash Receipts Journal
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Cash Receipts Transactions - FunctionsReceiving Cash
ReceiptsOver-the-Counter ReceiptsMail Receipts
Depositing Cash in BankDeposited intact daily
Recording the Receipts
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Sales Adjustment Transactions Common Documents and RecordsSales
return authorization
Authorization for accounts receivable write-off
Receiving report
Credit memo
Journal entry
Cash Receipts journal
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Sales Adjustment Functions and ControlsGranting Cash
Discounts
Granting Sales Returns and Allowances
Determining Uncollectible Accounts
Other Controls
Tests of Controls
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Study BreakThis cash receipts transaction document is a listing
of cash receipts received through the mail.Remittance
advicePrelistDaily cash summaryValidated deposit slip
B. Prelist
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Study BreakAll of the following are sales adjustment functions,
except:Granting cash discountsDetermining uncollectible
accountsRecording the cash receiptsGranting sales returns and
allowances
C. Recording the cash receipts
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Substantive Tests of Accounts ReceivableDetermining Detection
Risk for Tests of DetailsExistence and Occurrence
Completeness
Rights and Obligations
Valuation and Allocation
Presentation and Disclosure
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Designing Substantive TestsInitial Procedures
Analytical Procedures
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Designing Substantive TestsTests of Details of TransactionsVouch
Revenue Transactions
Trace Revenue Transactions
Perform Cutoff TestsSales Cutoff TestsSales Return Cutoff
Tests
Perform Cash Receipts Cutoff Test
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Designing Substantive TestsTests of Details of BalancesConfirm
Receivables
Forms of ConfirmationPositive ConfirmationNegative
Confirmation
Timing and Extent of Requests
Controlling the Requests
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Designing Substantive TestsTests of Details of
BalancesDisposition of Exceptions
Alternative Procedures for Dealing with Nonresponses
Summarizing and Evaluating Results
Applicability to Assertions
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Designing Substantive TestsTests of Details of Accounting
EstimatesAllowance for Doubtful AccountsAged Trial Balance
Tests of Details of Disclosures
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Study BreakThis type of confirmation requires a debtor to
respond only when the amount shown is incorrect.Positive
ConfirmationNegative ConfirmationAvoidanceExistence
B. Negative Confirmation
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Study BreakThis cutoff test is designed to obtain reasonable
assurance that cash receipts are recorded in the accounting period
in which received.Sales cutoff testSales return cutoff testVouching
revenue transactionsCash receipts cutoff test
D. Cash receipts cutoff test