Auditing the Revenue Cycle Ch 14
Chapter 14
Auditing the Revenue Cycle
|Learning Check |
14-1. a. The revenue cycle includes the activities involved in the exchange of goods and services with customers and the realization of the revenue in cash.
b. 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 uncollectible accounts
14-2. a. 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: • Recorded sales transactions represent goods shipped during the period (existence or occurrence). • All sales transactions that occurred during the period have been recorded (completeness). • The entity has the rights to receivables resulting from recorded credit sales transactions (rights and obligations). • All sales transactions are correctly journalized, summarized, and posted (valuation or allocation). • The details of sales transactions support their presentation in the financial statements including their classification and related disclosures (presentation and disclosure).
14-3. It may be appropriate to allocate a proportionately larger share of tolerable misstatement to accounts receivable because of high risk of misstatements in this account and the high costs of applying certain procedures used in auditing receivables (such as sending and processing confirmation requests). This simply means that the auditor chooses to allow relatively more of the total tolerable misstatement (financial statement materiality) remain undetected in accounts receivable where they
Auditing the Revenue Cycle
|Learning Check |
14-1. a. The revenue cycle includes the activities involved in the exchange of goods and services with customers and the realization of the revenue in cash.
b. 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 uncollectible accounts
14-2. a. 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: • Recorded sales transactions represent goods shipped during the period (existence or occurrence). • All sales transactions that occurred during the period have been recorded (completeness). • The entity has the rights to receivables resulting from recorded credit sales transactions (rights and obligations). • All sales transactions are correctly journalized, summarized, and posted (valuation or allocation). • The details of sales transactions support their presentation in the financial statements including their classification and related disclosures (presentation and disclosure).
14-3. It may be appropriate to allocate a proportionately larger share of tolerable misstatement to accounts receivable because of high risk of misstatements in this account and the high costs of applying certain procedures used in auditing receivables (such as sending and processing confirmation requests). This simply means that the auditor chooses to allow relatively more of the total tolerable misstatement (financial statement materiality) remain undetected in accounts receivable where they