Revenue Cycle
The revenue cycle includes these three types of transactions.
What are revenues, receivables, and cash receipts?
This occurs when an employee withholds funds received from a customer for personal use and fails to apply these receipts to the customer's receivable balance.
What is lapping?
Internal controls for inventory held by the entity is broken down into these two categories.
What are:
1. Adequate safeguarding of inventory, and
2. Proper segregation of duties?
In the investment cycle, these are the three activities that require a strong segregation of duties.
What are:
1. Authorization of purchase or sale of investments,
2. custody of investments, and
3. record keeping.
Regarding accounts payable, matching accounts payable to the GL, performing a search for unrecorded liabilities, and agreeing vendor statements to vendor accounts are all examples of tests for this assertion.
What is completeness?
The revenue cycle is one prone to fraud risk. These are some common revenue cycle frauds.
- Early revenue recognition
- Shifting sales from next period to current period
- Fake sales
- Failing to record sales returns
- Enticing customers to purchase unnecesssary goods and services
- Convincing distributors to purchase more inventory
This occurs when a check drawn on one bank account is deposited in another back account without recording the disbursement in the first account until after year-end.
What is kiting?
These are the three areas targeted in auditing procedures related to inventory.
What are:
1. Inventory balance,
2. Inventory transactions, and
3. Presentation and disclosure?
Equity and debt securities classified as trading or available-for-sale should be carried at ________.
What is fair value?
Confirming accounts payable with vendors is designed to test this assertion.
What is existence and occurrence?
These are the five distinct steps in the revenue cycle.
1. Sales order
2. Credit approval
3. Shipment
4. Billing
5. Accounting
This involves separating the responsibilities for writing checks, making deposits, and reconciling bank statements to ensure no single individual has control over all aspects of cash handling.
What is segregation of duties?
These are some of the disclosures, related to inventory, that are required under GAAP.
What are:
- Cost method,
- A breakdown of raw material, work-in-process, and finished goods inventories,
- Consigned inventory,
- Pledged or assigned inventory,
- Significant losses from inventory write-downs or purchase committments, and
- Warranty obligations.
These factors would indicate there is potentially an impairment of investments.
What are:
Fair value is significantly below cost
The security has been downgraded by a rating agency
The financial condition of the issuer has deteriorated
Dividends have been reduced or eliminated, or scheduled interest payments have not been made
The entity recorded losses from the security subsequent to the end of the reporting period
Recomputing vendor invoice is a test designed to test this assertion related to purchase transactions.
What is valuation, allocation, and accuracy?
An Auditor should review the accounts receivable schedule for both accuracy and collectability. This is required for GAAP Unless:
Receivables are Immaterial
Confirmation would be ineffective
Inherent and control risks are very low, and evidence provided by other procedures is sufficient to reduce audit risk to an acceptable level.
This system involves customers sending payments directly to a company's bank.
What is the lock box system?
This involves observing the client’s inventory count to verify the existence of a sample of items in the physical inventory report.
What is a physical inventory observation?
This is the three-level hierarchy used to measure fair value.
What are:
1. Observable quoted prices in active markets for identical assets or liabilities,
2. Observable inputs other than quoted market prices for identical assets or liabilities, and
3. Unobservable inputs using estimates and valuation methods, such as discounted cash flow, determined based on management's judgments.
This cycle includes all tangible assets with service lives great than one year.
What is the property, plant, and equipment cycle?
This occurs when there is a disparity between the amount of the receivable confirmed by the client’s customer.
Confirmation exception
This type of test evaluates the completeness assertion for cash receipts and disbursements.
What is tracing?
Inventory sales and purchases are audited during these cycles.
What are revenue and expenditure cycles?
These are the two primary tests of existence for investment balances.
What are:
- Confirmations of securities held by third parties and
- Examination of securities on hand?
In the payroll cycle, an auditor could perform these procedures to ensure only valid employees are paid, payments are for actual hours worked, and the correct pay rate is used.
What are:
Observe segregation of duties between HR and payroll distribution.
Compare personnel records with time cards and actual employees.
Conduct unannounced payroll distribution observations.
Observe time clock usage and investigate unused time cards.
Test transfers and employee authorizations for direct deposits.
Test general and application controls to validate payroll transactions.
Ensure only existing employees in computer data files are accepted.