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Chapter 14

Auditing the Revenue Cycle

|Learning Check |

The revenue cycle includes the activities involved in the exchange of goods and services with customers and the realization of the revenue in cash.

The classes of transactions in this cycle for a merchandising company are sales, sales adjustments, and cash receipts. The primary accounts affected by these transactions are sales, accounts receivable, cost of sales, inventory, cash, sales discounts, sales returns and allowances, bad debts expense, and allowance for uncollectable accounts

Specific audit objectives for the revenue cycle are derived from the five categories of management's financial statement assertions.

b.Specific audit objectives for credit sales transactions include the following: |Specific Audit Objectives | |Transaction Objectives | |Occurrence. Recorded sales transactions represent goods shipped or services provided during the period. | |Recorded cash receipt transactions represent cash received during the period. | |Recorded sales adjustment transactions during the period represent authorized discounts, returns and allowances, and | |uncollectable accounts. | |Completeness. All sales cash receipts and sales adjustments made during the period were recorded. | |Accuracy. All sales and cash receipts and sales adjustments are accurately valued using GAAP and correctly | |journalized, summarized and posted. | |Cutoff. All sales, cash receipts and sales adjustments have been recorded in the correct accounting period. | |Classification. All sales, cash receipts, and sales adjustments have been recorded in the proper accounts. | |Balance Objectives | |Existence. Accounts receivable representing amounts owed by customers exists at the balance sheet date. | |Completeness. Accounts receivable include all claims on customers at the balance sheet date. | |Rights and Obligations. Accounts receivable at the balance sheet date represent legal claims of the entity on | |customers for payment. | |Valuation and Allocation. Accounts receivable represents gross claims on customers at the balance sheet date and | |agrees with the sum of the accounts receivable subsidiary ledger. The allowance for uncollectable accounts | |represents a reasonable estimate of the difference between gross receivables and their net realizable value. | |Disclosure Objectives | |Occurrence and Rights and Obligations. Disclosed revenue cycle events and transactions have occurred and pertain to | |the entity. | |Completeness. All revenue cycle disclosures that should have been included in the financial statements have been | |included. | |Understandability. Revenue cycle information is appropriately presented and information in disclosures is | |understandable to users. | |b...
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