Chapter 7 revenue and collection
CHAPTER 7
Revenue and Collection Cycle
LEARNING OBJECTIVES
Review Checkpoints
Exercises, Problems, and Simulations
1. Discuss inherent risks related to the revenue and collection cycle with a focus on improper revenue recognition.
1, 2, 3
59
2. Describe the revenue and collection cycle, including typical source documents and controls.
4, 5, 6, 7, 8
54, 55, 61, 63, 64, 66
3. Give examples of tests of controls over customer credit approval, delivery, and accounts receivable accounting.
9, 10, 11, 12, 13, 14
56, 65
4. Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
15, 16, 17, 18, 19, 20, 21, 22
57, 58, 60, 61, 67, 68, 69, 70, 71, 72, 73
5. Describe some common errors and frauds in the revenue and collection cycle, and design some audit and investigation procedures for detecting them.
23, 24, 25 26, 27, 28
59, 62, 65, 74
SOLUTIONS FOR REVIEW CHECKPOINTS
7.1 Revenue recognition refers to including revenue in the financial statements. According to GAAP, this is done when revenues are (1) realized or realizable and (2) earned.
7.2 Revenue recognition is used as a primary means for inflating profits for several reasons. First, it is not always straightforward when revenues have been earned. Sales can be structured with return provisions, or can have other performance provisions attached. Second, the timing of shipments at year end may be easy to falsify. Third, companies are often valued at multiples of revenue instead of net income.
7.3 "Bill and Hold" sales are recognized when sales are billed, thus creating a receivable, but the goods are held by the seller until the customer actually wants them.
7.4 The basic sequence of activities and accounting in a revenue and collection cycle is:
1. Receiving and processing customer orders. Entering data in an order system and
Revenue and Collection Cycle
LEARNING OBJECTIVES
Review Checkpoints
Exercises, Problems, and Simulations
1. Discuss inherent risks related to the revenue and collection cycle with a focus on improper revenue recognition.
1, 2, 3
59
2. Describe the revenue and collection cycle, including typical source documents and controls.
4, 5, 6, 7, 8
54, 55, 61, 63, 64, 66
3. Give examples of tests of controls over customer credit approval, delivery, and accounts receivable accounting.
9, 10, 11, 12, 13, 14
56, 65
4. Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
15, 16, 17, 18, 19, 20, 21, 22
57, 58, 60, 61, 67, 68, 69, 70, 71, 72, 73
5. Describe some common errors and frauds in the revenue and collection cycle, and design some audit and investigation procedures for detecting them.
23, 24, 25 26, 27, 28
59, 62, 65, 74
SOLUTIONS FOR REVIEW CHECKPOINTS
7.1 Revenue recognition refers to including revenue in the financial statements. According to GAAP, this is done when revenues are (1) realized or realizable and (2) earned.
7.2 Revenue recognition is used as a primary means for inflating profits for several reasons. First, it is not always straightforward when revenues have been earned. Sales can be structured with return provisions, or can have other performance provisions attached. Second, the timing of shipments at year end may be easy to falsify. Third, companies are often valued at multiples of revenue instead of net income.
7.3 "Bill and Hold" sales are recognized when sales are billed, thus creating a receivable, but the goods are held by the seller until the customer actually wants them.
7.4 The basic sequence of activities and accounting in a revenue and collection cycle is:
1. Receiving and processing customer orders. Entering data in an order system and