AUDITING AND ASSURANCE SERVICES IN MALAYSIA TOPIC 8: AUDIT OF REVENUE AND RECEIPTS CYCLE + ACCOUNT RECEIVABLES References: Chapter 9 AUD390 2011
AUDITING AND ASSURANCE SERVICES
IN MALAYSIA
TOPIC 8: AUDIT OF REVENUE AND RECEIPTS
CYCLE + ACCOUNT RECEIVABLES
References: Chapter 9
AUD390 2011
LEARNING OUTCOMES
Overview of the accounts & classes of transactions
Business functions & documents Financial report assertions Major internal control and related
audit procedures Substantive tests for accounts
receivable
AUD390 2011
OVERVIEW OF REVENUE & RECEIPTS CYCLE
Accounts in the Cycle Classes of Transactions Business functions Documents & records
AUD390 AUDITING DIA
ACCOUNTS IN THE CYCLE
Cash Sales: Cash/Bank Acc vs. Sales Acc Credit Sales: Acc Receivable vs. Sales Acc Sales Return & Allowance: Sales Return Acc
vs. Acc receivable vs. Cash/Bank Acc Charge of for bad debts: Bad Debt Expense
Acc vs. Acc Receivable
AUD390 AUDITING DIA
CLASSES OF TRANSACTIONS
1. Sales (cash and sales on account)2. Cash receipts3. Sales returns & allowances4. Charge-off of uncollectible accounts5. Estimate of bad debt expense
AUD390 AUDITING DIA
AUD390 AUDITING DIA
CLASSES OF TRANSACTIONS
ACCOUNTS BUSINESS FUNCTIONS
DOCUMENTS & RECORDS
1.Sales SalesAcc Receivable
i. Processing customer orderii. Granting creditiii. Shipping goodsiv. Billing customers & recording sales
Customer orderSales orderCustomer order or sales orderShipping documentSales invoiceSales transaction fileSales journal or listingAccount receivable master fileAccounts receivable trial balanceMonthly statement
AUD390 AUDITING DIA
CLASSES OF TRANSACTIONS
ACCOUNTS BUSINESS FUNCTIONS
DOCUMENTS & RECORDS
2. Cash Receipts BankAccount Receivable
v. Processing & recording cash receipts
Remittance advicePrelisting of cash receiptsCash receipts transaction fileCash receipts journal or listing
3. Sales returns & Allowances
Sales Returns & AllowancesAccount Receivable
vi. Processing & recording sales returns & allowances
Credit memoSales returns & allowances journal
4. Charge-off of uncollectible accounts
Account ReceivableAllowance for uncollectible accounts
vii. Charging off uncollectible accounts receivable
Uncollectible account authorization formGeneral journal
5. Bad Debt Expense Bad debt expenseAllowance for uncollectible accounts
viii. Providing for bad debts
General journal
KEY CONTROL ACTIVITIES
1. Adequate separation of duties2. Proper authorization3. Adequate documents & records4. Prenumbered documents5. Monthly statements6. Internal verification procedures
AUD390 AUDITING DIA
Adequate Separation Of Duties
Important to prevent various types of intentional & unintentional type of misstatements
General example guidelines:Anyone responsible for inputting sales and
cash receipts transaction information into the computer being denied to access to cash
To separate credit-granting function from the sales function because credit checks are intended to influence sales personnel to optimize volume of sales even at the expense of high bad debt written off
AUD390 AUDITING DIA
Proper Authorization
Authorization at three key points1. Credit must be properly
authorized before a sale take places
2. Goods should be shipped only after proper authorization
3. Price, including basic terms, freight, & discount must be authorized
AUD390 AUDITING DIA
To prevent the loss of company assets by
shipping to fictitious customers or those
who fail to pay for the goods
To ensure that the sale is billed at the
price set by company policy
Adequate Documents & Records General example guidelines:
Prepare a multicopy prenumbered sales invoice at the time a customer order is received. Copies are used for different purpose: Approve credit Authorize shipment Record the number of unit shipped Billed customers
AUD390 AUDITING DIA
Prenumbered Documents Use of prenumbering, to prevent:
the failure to bill or record sales The occurrence of duplicate billings and
recordings E.g.
A billing clerk filed a copy of all shipping documents in sequential order after each shipment is billed
To program the computer to prepare a listing of unused numbers at month’s end with follow-up by appropriate personnel
AUD390 AUDITING DIA
Monthly Statements
It is sending monthly to customer either generated by computer or by someone who has no direct relationship in handling cash or preparing sales & account receivables
It encourage a response from customers if the balance is improperly stated
AUD390 AUDITING DIA
Internal Verification Procedures Use of computer programs or independent
persons for checking the processing and recording of sales transactions
E.g.Accounting for the numerical sequence of
prenumbered documentsChecking the accuracy of document
preparationReceiving reports for unusual or incorrect
items
AUD390 AUDITING DIA
AUDIT OF ACCOUNT RECEIVABLES
Using Tests of Details of Balance1. Recorded Acc Receivables exist2. Existing Acc Receivables are included3. Acc Receivables are accurate4. Acc Receivables are properly classified5. Cutoff for Acc Receivables is correct6. Acc Receivables is stated at realizable value7. The client has rights to Acc Receivable8. Acc Receivable presentation & disclosure are
proper
AUD390 AUDITING DIA
Recorded Account Receivables Exist
Determine the existence of A.R. amount through confirmation with customers
ISA505 External Confirmation provides guideline to auditors in using confirmation letter as a method to obtain audit evidence
In using confirmation, auditor must decideType of confirmation (positive, negative or blank confirmation)
Timing of the procedures (when to request the information)
Sample size Individual items to select
AUD390 AUDITING DIA
Existing Account Receivables Are Included
By footing the A.R. trial balance & reconciling the balance with the control account in the general ledger
AUD390 AUDITING DIA
Account Receivables Are Accurate
Tests of the debit & credit to individual customers’ balances are done by examining supporting documentation for shipments & cash receipts
AUD390 AUDITING DIA
Account Receivables Are Properly Classified
Review aged trial balance to ensure A.R. is properly classifies under current assets
AUD390 AUDITING DIA
Cutoff For Account Receivables Is Correct
To verify whether transactions near the end of accounting period are recorded in the proper period
Example: checking the intentional or unintentional inclusion of several large and subsequent period sales in the current period
AUD390 AUDITING DIA
Account Receivables Is Stated At Realizable Value
To evaluate the account allowance for uncollectible accounts
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The Client Has Rights To Account Receivable
Not the issue since A.R. usually belong to the customer
Audit procedures involved: Review of minutes Discussion with the client Confirmation with bank Examination of debts contract for evidence of
AR pledged as collateral
AUD390 AUDITING DIA
Account Receivable Presentation & Disclosure Are Proper
According to generally accepted accounting principles & presentation and disclosure requirements
AUD390 AUDITING DIA
GROUP DISCUSSION
AUD390 AUDITING DIA