Chapter 11 The Revenues, Receivables and Receipts Process

Transcription

1 Chapter 11 The Revenues, Receivables and Receipts Process Understanding the Revenue, Receivables and Receipts Process The auditor must understand the business s method of generating revenues and use of them in operations in order to ASSESS the BUSINESS RISK AND RISK OF MISSTATEMENT. o Management s assertions regarding existence, ownership, completeness, valuation and disclosure ALL present risks the auditor needs to consider. Revenues, Receivables and Receipts Process: Typical Activities Revenue, receivables and receipt process activities include: o Receiving and processing customer orders. o Delivering goods and services to customers. o Billing customers and accounting for receivables. o Collecting and depositing cash. o Reconciling bank accounts. Note: There will be different controls along the way to ensure all of these processes and activities are correct, complete and accurate Authorization When a customer purchase order (PO) is received, a number of AUTHORIZATIONS need to be verified BEFORE a sales order can be created. o The customer status (new or current) We have to understand whether the client is new or a continuing client. o Their credit status o Availability of inventory (backorder) Is it available...if not can we backorder it o Approved pricing of products We have to ensure that the customer understood the pricing agreement Note: o Most important aspect is authorization. o POs can be faxed in/ ed by customers. These represent a contract with our customers. Sales Approval Looking to see whether a sales order has the proper authorization for any differences in pricing Keval Shah Chapter 11 AFM 451 1

2 Once the authorizations are passed the system creates: 1. An open sales order (in the PENDING ORDER MASTER FILE) 2. A packing slip (will go to the stock keeper very important document allows shipping department to ship those documents) Authorizes the stock keeper to release inventory to shipping department Authorized the shipping department to ship the goods The system should also update the: 3. Inventory master file for the commitment of goods. Note: The pending open sales order and packing slip SHOULD BE NUMBERED IN SEQUENCE so that the system can determine if any transactions have not been completed (completeness) ***Important Control Activities***: Control activities relate to: 1. CUSTODY of assets and records (Inventory) (***UFE Case Question shipping dep. adjusting this) Physical custody of inventory starts with the STOCKROOM or WAREHOUSE where inventory is kept. i. Custody is transferred to the shipping department only on the authorization of the packing slips. If stockkeepers or shippers have the ability to change quantities shown on packing slips, a weakness in separation of duties is created. This can allow for inventory to be stolen. 2. Properly RECORDING transactions and events When the shipment is complete, the open sales order is closed and the following documents are created: i. a BILL OF LADING shipping document outlines what # of products were shipped ii. a SALES INVOICE billing the customer for goods shipped sent to the customer Personnel with the ability to enter, alter, and/or physically intercept the sales invoice have a combination of incompatible responsibilities (authorization, custody & recording). 3. Performing RECONCILIATION procedures to check completeness and integrity of records A comparison of the total unpaid balances to the accounts receivable control account is a common reconciliation. An aged trial balance is usually used for this reconciliation. This should be performed by personnel who have no responsibility over authorization, custody or recording of transactions. i. i.e. Match Bill of Lading to SHIPPING INVOICE ii. When we look at A/R match it to aged TB Cash Receipts and Cash Balances Most companies require little authorization to ACCEPT payments from customers. Cash can be received in many ways, over the counter, mail, lockbox, or electronic funds transfer. o Cheques provide an extra layer of security cash no records kept Authorization is required for approving discounts, returns and allowances. o Receiving cash and approving discounts or allowances are incompatible functions. (because they can pocket it) Keval Shah Chapter 11 AFM 451 2

3 Custody of Cash At some point, someone has the cash and cheques in hand, and has physical custody. o A number of controls should be considered, including forced vacations, rotation of staff, technological controls and insurance (e.g., fidelity bond). o Lock boxes are a great way to account for cash or cheques being stolen It s a good idea to record the cash/cheques ASAP in the process (i.e., REMITTANCE LISTS) o Remittance Lists Having 2 people involved why not have 2 people opening the mail. 2 people requires collusion maybe one person will have a conscience and will want to steal Recording of Cash Receipts The accountants responsible for recording of cash into the accounting system should NOT also handle cash. Cash should be initially recorded using CASH REMITTANCE LISTS, the accountant should record from these lists. A copy of the list is sent to A/R and GL accountants The cash account + A/R control account + A/R subsidiary accounts are all updated. o A/R Control Account = Involved all A/R transactions from ALL debtors = A/R Balance o A/R Subsidiary Account = every debtor has an account. All of the sub A/R balances total up to the control A/R receivable Periodic Reconciliation Bank reconciliations need to be prepared monthly o Bank deposit slips should be traced to the cash remittance lists o Paid cheques should be compared to the disbursements journal. The reconciliations should be performed by personnel who do not have responsibility for recording cash receipts (i.e., preparing remittance lists) or disbursements. Audit EVIDENCE in Management Reports and Data Files Audit evidence will be found in a number of reports created by management o Pending order master file (completeness) o Credit check files (up-to-date maintenance) Case Always try to be EXTRA conservative if its done on a regular basis don t suggest it should be done more o Price list master file (must be correct for billing) who has access to it should be different from the sales rep o Sales detail (sales journal) file (compare to shipments and dates) o Sales analysis reports (by product line, by employee and investigate unusual items) One district had larger sales for one period and smaller sales for the next period. Red Flag. Would not find this without checking for period vs. period. o A/R aged trial balance (assessing bad debts and accounting for balances) o Cash receipts journal (deposits, receipts, adjusting entries re: bank) Keval Shah Chapter 11 AFM 451 3

4 Whenever there are dates involved, check to see if the period is good enough (regular) for CASE Internal Control Objectives for Sales 1. VALIDITY Sales are valid and documented 2. COMPLETENESS No sales transactions are omitted 3. AUTHORIZATION Sales are authorized 4. ACCURACY Sales invoices are accurately prepared 5. CLASSIFICATION Sales transactions are properly classified 6. ACCOUNTING Sales transactions recorded conform to GAAP 7. PROPER PERIOD Sales transactions are in the proper period ***Dual-direction testing tests for COMPLETENESS and VALIDITY at the same time. Control Tests for Sales ***Know these tests and match to IC Objectives what does it provide evidence for?*** 1. Select a sample of shipping docs: a. Scan for missing numbers (Provides evidence for COMPLETENESS) b. Trace to related sales invoices (COMPLETENESS) 2. Scan sales invoices for missing numbers in the sequence (COMPLETENESS) 3. Select a sample of sales invoices (Sales Journal) a. Perform recalculations to verify arithmetic accuracy (ACCURACY) b. Vouch to supporting shipping documents (VALIDITY, ACCURACY, PROPER PERIOD, AUTHO.) c. Vouch prices to approved price list (AUTHORIZATION) d. Vouch credit approval (AUTHORIZATION) e. Trace posting to general ledger and customer account (ACCOUNTING) 4. Observe customer order handling (OVERALL CONTROL ENVIRONMENT) Control Tests for Cash Receipts 1. Select a sample of recorded cash receipts (cash rec jrnl): a. Vouch to deposit slip and remittance advices (VALIDITY) b. Trace to bank statement (VALIDITY) c. Trace posting to general ledger accounts (ACCOUNTING) d. Trace posting to subsidiary accounts (ACCOUNTING) 2. Select a sample of remittance lists a. Trace to cash receipts journal (COMPLETENESS) b. Trace journal posting to general ledger (ACCOUNTING) c. Trace to bank statement (ACCURACY) 3. Observe the work habits of cashiers and their interactions with persons keeping cash records (OVERALL CONTROL ENVIRONMENT) Control Tests for A/R 1. Trace sales invoices to accounts receivable (ACCOUNTING) 2. Trace cash receipts to accounts receivable posting (ACCOUNTING) Keval Shah Chapter 11 AFM 451 4

5 3. Select a sample of credit memos a. Review for proper approval (AUTHORIZATION) b. Trace to posting in customer accounts (ACCOUNTING) 4. Select a sample of customer accounts a. Vouch debits to supporting sales invoices (VALIDITY) b. Vouch credits to supporting cash receipts documents and approved credit memos (VALIDITY) 5. Observe mailing of monthly customer statements (VALIDITY) Summary: Control Risk Assessment Control Risk Assessment Process that the auditor uses to understand the client s IC that will be sufficient to identify and assess the RMM of the F/S whether due to fraud or error, and to design and perform further audit procedures; required to comply with the second examination standard of GAAS The purpose of testing controls is to determine nature, extent, and timing of substantive procedures. Good controls = low control risk: Smaller sample sizes, earlier timing for some substantive tests. Poor controls = high control risk: Larger samples, more work at year end. Special Note: Evidence for THE EXISTENCE ASSERTION For accounts receivables and other assets, auditors place their main emphasis on existence and rights assertions. Recalculation o Focus on assets that DEPEND LARGELY ON CALCULATIONS (prepaid expenses, depreciation, interest payments). Inspection of Physical Assets o Inventories and assets can be examined, o Title to cars, land, buildings can be vouched, o Securities held for investment can be inspected. Confirmation o Bank accounts, receivables can be confirmed. o Assets at other locations or in the hands of custodians can also be confirmed. Enquiry o Enquire should be made as to agreements regarding minimum balances, pledging of receivables, pledging of other assets. **Not the most convincing of evidence Inspection of Documents (VOUCHING) o Examine title documents, collateral, pledges Inspection of Documents (SCANNING) o Look for misclassified assets, uncharacteristic balances, errors or overpayments, or related party transactions and balances Keval Shah Chapter 11 AFM 451 5

6 Analysis (ANALYTICAL PROCEDURES) o Comparison of assets to related revenues or expenses, expenses with revenues, contra revenues with revenues, and write-offs. Special Note: Confirmation of A/R and Notes Receivable Confirmations can provide evidence about EXISTENCE and VALUATION of accounts and notes receivable. Statistical methods can be used to determine the size and selection of accounts to be confirmed. Confirmations may make use of positive confirmations or negative confirmations. Confirmations will NOT provide sufficient evidence regarding ownership. e.g., A/R may be sold (factored) or collateralized Positive Confirmations A positive confirmation requires a response in all cases, whether the balance is correct or incorrect. Used where individual balances are large, or where accounts are in dispute. The confirmation may ask for information on balances or specific invoices depending on knowledge of the customer s accounting records. Nonresponses are tolerated if the auditor can verify the info through other means. Generally produces high quality evidence. o Auditors need to consider alternative procedures when no response is provided. Customer POs, Sales Invoices, Bills of Lading, Subsequent Collections Response Rate = # of confirmations returned/# of confirmations sent Detection Rate = # of misstatements reported/number of actual account misstatements Negative Confirmations The negative confirmation form only requires a response if the customer disagrees with the balance. Useful when o inherent and control risk are low, o a large number of customers are involved, and o where the auditor believes that the customers will handle the confirmations correctly. Evidence collected from negative confirmations is considered far less reliable than from positive confirmations. Control over Confirmations The auditor needs to maintain control over the entire confirmation process o To ensure that confirmations reach the intended customers/lenders, and that they actually exist. o To ensure that responses are from actual customers/lenders Summary: Confirmations Keval Shah Chapter 11 AFM 451 6

7 Confirmations of cash, loans and accounts and notes receivable are required unless auditors can justify substituting procedures. Auditors need to exercise care in ensuring that responses are received from real debtors. Note that confirmations do not confirm collectability of receivables or ownership of receivables. Special Note: Audit of Bank Reconciliation Reconciliation EXPLAINS the difference b/w the amount on books vs. amt in bank Bank reconciliations - o Bank balance is confirmed with bank. o The reconciliation is recalculated and re-footed. o Reconciling items are VOUCHED 100% to supporting documentation. Vouch all items on the reconciliation if doing monthly o The auditor obtains cutoff bank statement directly from the client s bank. If auditor reperforms bank rec, it is A SUBSTANTIVE PROCEDURE Accounts Receivable LAPPING Manipulation of accounts receivable to cover a theft or fraud. o Receipts from one customer are applied to another customer s account to cover misappropriation payments received. Lapping person who is collecting the cash and they are also in charge of recording I am going to borrow it and pay it back.oh I will apply the new customer s payment to the old one.stalling the payment Audit procedures include comparison of cheques on a daily deposit slip to the detail of customer accounts credited on that day. o Looking for a customers credited for whom no payment was received. Cheque KITING Deliberate floating of funds using hot cheques to create apparent cash balances. o Uses the time required for cheques to clear to obtain an unauthorized short-term loan. o The depository bank does not know the cheque is on insufficient funds, and the deficiency will be covered by a second hot cheque. o If you are broke, you take a cheque from one account and you deposit it in the other but you are borrowing money and making it look like you have more money in one account than you actually do Audit procedure is to review all interbank transfers and prepare a bank transfer schedule to ensure that all transfers are recorded in proper period Bank Transfer Schedule = An audit analysis summarizing all the transfers between the auditee s bank accounts in the days just before and after the period end, to verify each amount transferred is included in only one account at the period end, not double counted Window Dressing: Keval Shah Chapter 11 AFM 451 7

8 o The inappropriate manipulation of account balances by mgmt., usually at the end of a period, to make the financial position or performance reported in the F/S appear more attractive to users o Often involves using accounting policies, JE, or actual cash transactions b/w related parties that have no real business purpose, resulting in artificial embellishment of the company results or liquidity Lecture 15: A Walk through the Sales, Receivables and Cash Receipts Process Customer Order Processing 1. When a customer s purchase order is received, a number of important authorizations must occur before product is shipped o Prices should be pulled from a pre-authorized price list (price list master file) and populated on the electronic order form. Any deviations (i.e., discounts) from approved pricing should require authorization from a sales manager or other o Note: Pre-Authorized price lists ensure that authorized prices are charged to customers and automatically populating the price list ensures accuracy (no human transposition errors) 2. Customer credit status should be checked and any orders exceeding credit limits should be put on hold until a higher credit limit is authorized by a manager from either A/R or another established Credit Department o Likewise, all new customer orders should be placed on hold until proper credit checks are completed as no credit has yet been established If credit is not granted, customers is will need to pay cash on delivery (COD). o Note: All credit granting/ increases should be approved by those outside the sales department (sales dept s have incentive to push product out the door) ensuring that the company is not exposed to excessive credit risk The whole credit approval process should be outside the sales department You shouldn t have the sales manager be able to override the credit terms because their incentive is based on the sales (commission) 3. The system should check to see if there is enough inventory to ship. If not, then a backorder is entered and the customer should be notified Keval Shah Chapter 11 AFM 451 8

9 o This ensures that customers are aware of any lag times to get their goods (customer satisfaction issue) 4. It is good practice to LIMIT credit for new customers until a reliable payment history is established o Lower credit limits to start with help to limit exposure to credit risk from new customers o Credit Ratings/Reports are good often times the credit that we provide is based on the relationship/history that we develop with them Offering Credit is a risk to business so make sure it s not too low from the beginning Shipping/Fulfillment of Orders After credit is authorized, an open sales order is created (updating the PENDING ORDER MASTER FILE and INVENTORY MASTER FILE) o Inventory Master File = The amount of product that the sales order is processing 1. PACKING SLIPS (3) are generated and routed to the Warehouse providing the inventory clerk authorization to pick the goods and transfer their custody to the Shipping Dept. o One copy of the packing slip should be kept in the warehouse o Two other copies should be sent along with the inventory goods to the shipping dept. o Note: System-generated packing slips help ensure authorization of custody transfer and the proper amount of goods for release to shipping o When the inventory clerk transfers the goods + packing slips to the shipping clerk 2. The shipping clerk should compare the goods received with the attached PACKING SLIP and the system-generated CUSTOMER ORDER before preparing shipment to customer o The shipping clerk should initial the packing slip to indicate that this review was done Very important to provide evidence along the way that this has been accomplished o This ensures that the amounts that have been picked and that will be sent to the customer are accurate 3. The shipping clerk can begin completion of the transaction o The system should print three BILLS OF LADING based on the packing slip, One copy is kept in shipping dept. with copy of packing slip, One copy is sent to customer with shipped goods, One copy is sent with copy of packing slip to A/R o The system should now remove the pending order from the PENDING ORDER MASTER FILE, record the sale and generate the CUSTOMER INVOICE o This ensures that goods shipped to customers are accurately recorded and invoiced and also that sales are recorded only when goods have shipped. o Note: The bill of lading provides evidence of what should be in the box 4. The PENDING ORDER MASTER FILE should be reviewed on a regular basis by a customer service manager/sales manager and followed up with the shipping department and the customer. o This helps to ensure that goods ordered by customers are shipped in a timely manner and also may uncover shipments that have been made but have not been recorded in system (completeness). Billing of Orders Keval Shah Chapter 11 AFM 451 9

10 1. The A/R clerk matches up shipments made per the SALES DETAIL REPORT to the PACKING SLIPS and BILLS OF LADING sent by shipping dept with customer invoices to ensure that a. all shipments made have been invoiced (completeness) b. customer invoices reflect the correct amount and type of goods that were shipped (accuracy, completeness) c. all customer invoices generated have corresponding shipment(s) (validity) 2. The A/R clerk should print the CUSTOMER INVOICES and match them to the BILL OF LADING and mail both together to customers a. Note: This ensures that customer invoices reflect goods that actually shipped and that they are billed on a timely basis Processing Payments 1. Customer payments should be recorded immediately upon receipt using CASH REMITTANCE LISTS by an individual not also responsible for approving/recording discounts, returns or allowances (e.g., Cashier). a. It is best to have two cashiers opening mail and recording receipts b. Checks should be stamped for deposit only in acct i. This helps prevent theft of cash and/or cheques 2. Three copies of CASH REMITTANCE LIST are generated a. One is sent with customer payments to the cash management clerk where discounts are approved and taken to bank with a DEPOSIT SLIP b. One is sent to A/R clerk to post to customer accounts (A/R SUBLEDGER) c. One is sent to G/L accountant who posts to CASH RECEIPTS JOURNAL and then posts to G/L control accounts Monthly Reconciliation of Receipts 1. BANK DEPOSIT SLIPS should be traced to the CASH REMITTANCE LISTS a. ensures that all money collected has been deposited i. This rec should be performed by personnel who do not have responsibility for recording cash receipts (i.e., preparing the remittance lists). 2. A/R SUBLEDGER should be traced to G/L CONTROL ACCOUNT (the GL) a. ensures that the sum of customer s unpaid balances are reflected i. This rec should be performed by personnel who do not have responsibility over authorization, custody or recording of transactions. Audit Evidence Management Reports and Data Files (For Reference) Pending Order Master File: Contains SALES TRANSACTIONS started but not yet completed in the system not recorded as sales and A/R Keval Shah Chapter 11 AFM

11 Old orders may represent shipments ACTUALLY MADE but for some reason the shipping department did not enter the shipping information (or entered an incorrect code that did not match the pending order) Pending order backlog can be reviewed for evidence relating to the COMPLETENESS ASSERTION Credit Check Files Up-to-date maintenance of credit info is very imp Customers credit status is concerned with possibly uncollectible A/R imp evidence about the VALUATION ASSERTION Credit checks on old or incomplete info are NOT good credit checks Price List Master File Customer system may produce customer invoices automatically but if the master price list is wrong, the billings will be wrong Computer file can be compared w/ official price source for accuracy and authorization o Employee should perform comparison every time the prices are changed Incorrect pricing revenues/a/r measured incorrectly VALUATION ASSERTION Sales Detail (Sales Journal) File Should contain detailed sales entries shipping references + dates Can be scanned for entries without shipping references (fictitious sales) and for matching recording dates with shipment dates (sales recorded before shipment) Also contains the population of debit entries to A/R EXISTENCE ASSERTION FOR REVENUES/A/R o CAAT = COMPUTER ASSISTED AUDITING TECHNIQUES Sales Analysis Reports Sales classified by product line or region is info for the business segment disclosures Those classified by period or by sales employee can show unusually high or low volumes that may need investigation if error is suspected COMPLETENESS, EXISTENCE OF REVENUES Aged A/R Trial Balance The list of A/R balance details is called the A/R SUBSIDIARY LEDGER The summary of the subsidiary ledger by invoice dates is called the aged A/R trial balance If the General Ledger Control Account > Sum in the Aged Trial Balance bad! o A receivable amount not identified with a customer cannot be collected The trial balance is used for CONFIRMATION Existence, completeness and valuation assertions of A/R Cash Receipts Journal Contains all detail for cash deposits and credits to various accounts and is the population of entries that should be the credits to A/R for customer payments Keval Shah Chapter 11 AFM

12 Also contains any adjusting or correcting entries resulting from bank rec o These entries may signal the types of accounting errors/manipulations that happen in the cash receipts accounting and provide evidence relating to existence and completeness of cash and A/R Keval Shah Chapter 11 AFM