Revenue cycle audit objectives

Chapter 9: Auditing the Revenue Cycle

IT Auditing, Hall, 4e

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Learning Objectives

Understand the operational tasks associated with the revenue cycle under different levels of technology.

Understand audit objectives related to the revenue cycle.

Be familiar with revenue cycle control issues related to alternative technologies.

Recognize the relationship between revenue cycle audit objective, controls, and tests of controls.

Understand the nature of substantive tests in achieving revenue cycle audit objectives.

Be familiar with common features and functions of ACL that are used to preform substantive tests.

© 2016 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Revenue Cycle Activities and Technologies

Batch-Processing Sales Order System:

Order taking, credit checking, warehousing, and shipping are performed manually. Computer processes accounting records.

Obtain and record customers’ orders:

Sales order prepared with one copy placed in the customer open order file. Credit authorization copy to credit department for approval. Authorized copy triggers release of sales order into system. Stock release (picking ticket) copy to warehouse. Provides formal authorization to release inventory.

Shipping department receives file copy, packing slip and shipping notice copies. Packing slip stays with goods. Shipping notice informs billing department customer order has been filled and shipped.

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Revenue Cycle Activities and Technologies

Obtain and record customers’ orders (cont’d):

Shipping clerk reconciles items with documents, packages goods, attaches packing slip, completes shipping notice, prepares a bill of lading (BOL) and transfers goods to carrier.

Clerk records shipment, sends shipping notice to billing and files one copy of the BOL and shipping documents.

Computer programs (runs) process batches of sales orders and then pass the batch to the next run.

Data entry clerk coverts hardcopy shipping notices to a file.

Edit run tests for errors and sort fun reorders file by account.

AR update and billing run and inventory update run update files and triggers reorders. GL update run updates the GL accounts.

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Batch Processing Cash Receipts System

Cash receipts procedures are natural batch systems.

Mailroom separates checks and remittance advices and prepares a remittance list as a control document. Checks and copy of list sent to cash receipts. Remittance advices and copy of list go to AR.

Cash Receipts clerk reconciles checks with list, prepares deposit slips and creates a transaction file as input for the batch process.

AR clerk receives listing of all transactions processed, reconciles this list with other documents and files them.

Data processing runs a Master File update to update customer records in the AR Voucher file and a GL Update which is an end-of-day process.

Controller’s office conducts periodic reviews of deposit slips returned from the bank and remittance lists prepared in the mailroom to reconcile final deposit with original receipt.

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Integrated Real-Time Sales Order System

Sales clerks receive and enter sales orders and initiate the following tasks:

Verify inventory availability and perform credit check. If approved, system adds record to the sales invoice file and transmits digital stock release to warehouse and digital packing slip to shipping.

Warehouse terminal generates hard-copy and clerk picks goods and send them to shipping with the stock release.

Shipping reconciles goods, prepares and ships them. After shipping a digital notice signals transaction is complete.

System automatically: updates customer credit history, reduces quantity on hand, determines and processes reorder if needed, inserts a ship date in sales invoice record, updates GL accounts and produces and distributes various management reports.

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Integrated Real-Time Cash Receipts System

Mailroom opens checks and remittance advices (RA), endorses checks “For Deposit Only” and prepares copies of remittance list. Copy of list and checks to Cash Receipts.

Cash Receipts reconciles checks and RA with list, prepares deposit slips, creates a record in remittance file and files documents.

Security group deposits checks.

Automatic data-processing procedures:

Closes sales invoices by placing customer check number and payment date in invoice record, posts to GL and prepares and distributes management reports.

Controller's Office performs periodic reconciliations.

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Relationship Between Management Assertions and Revenue Cycle Audit Objectives

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Point-of-Sale Systems

POS systems used extensively in retail companies.

Customers take inventory to cashier who scans UPCs.

POS system retrieves price and reduces inventory which is automatically reordered as needed. After all UPCs are scanned, taxes and totals automatically calculated.

Copy of receipt to customer with another stored internally.

After cash drawer reconciled to internal tape, cash receipts prepares cash reconciliation form, records to cash receipts journal, files credit card vouchers and secures cash.

Three-part deposit slip prepared and cash deposited. Batch program summarizes sales and cash receipts journal, prepares journal voucher and posts to GL. Cash over and short must be recorded.

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Input Controls

Ensure transactions are valid, accurate and complete.

Credit authorization procedures ensure creditworthy customers.

Control techniques vary considerably between batch systems and real-time systems.

Testing credit procedures:

Determine effective procedures exist to establish credit limits, information is communicated, credit policies are reviewed periodically and adherence to current policy is monitored.

Verify the correctness of programmed decision rules using either the test data or integrated test facility approach.

Verify proper authority for making line-of-credit changes.

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Relationship:

The higher the DR, the more substantive procedures needed.

The lower the DR, the fewer substantive procedures needed.

Input Controls

Data validation controls intended to detect transcription errors in data before they are processed. In batch systems, data validation occurs after goods have been shipped.

Real time and POS systems can deal with errors as they occur.

General validation tests include:

Missing data checks for the presence of blank fields.

Numeric-Alphabetic data checks for the correct form of data.

Limit checks to ensure value does not exceed max for the field.

Range checks ensures data is within upper and lower limits.

Validity checks compare actual values against acceptable values.

Check digit identify keystroke errors by testing internal validity.

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Relationship:

The higher the DR, the more substantive procedures needed.

The lower the DR, the fewer substantive procedures needed.

Input Controls

Testing Data Validation Controls:

Central audit issue is whether validation programs in data editing system are functioning correctly and have continued to function as intended through the period.

Validation of program logic can be difficult.

If controls over system development and maintenance are NOT weak, testing data editing/programming logic more efficient than substantive tests of details (test data, ITF).

Some assurance can be gained through the testing of error lists and error logs (detected errors only).

Objective to reconcile output with original input. Controls continue through all computer processes.

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Input Controls

Important element is the batch transmittal sheet which captures relevant information about the batch.

Information entered as a separate control record system uses to verify the integrity of the batch.

Task of reconciling processing with control record provides assurance all sales invoices and cash receipts entered were processed (or rejected because of errors) only one time.

Testing batch controls:

Involves reviewing transmittal records of batches processed and reconciling them to the batch control log (batch transmittal sheet).

Batch control totals are also a valuable tool.

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Process Controls

File update controls: Ensure each run in system processes the batch correctly and completely.

Transaction code controls – Tasks performed determined by transaction code assigned to records. Errors can cause incorrect processing resulting in materially misstated sales and AR.

Sequence check controls – When system uses sequential master files, order of records in batch critical to correct and complete processing.