TOPIC 2_AUDIT OF REVENUE CYCLE

BKAA 3023 AUDITING AND ASSURANCE II

IN CLASS ACTIVITY

GROUP 1 GROUP MEMBER

LEE CHU XUAN - 277242
CHNG ZHI YEE - 277239

CHIN PEI EN - 278765
SOON KYE JIAN - 279129
CHEW YAR - HUEY - 279161
SHAKKTHI A/P M.KUMARAN - 280505

AUDIT OF REVENUE CYCLE

INTRODUCTION

The revenue cycle includes selling transactions that begin with receiving orders
from customers, delivering and billing to customers, and recording and collecting
accounts receivable.

OBJECTIVES

The revenue and receivables audit criteria are concerned with obtaining adequate
audit evidence for the transactions and balances. The most important things to look
for while auditing sales and receivables are:

The sales are neither understated nor overstated, and the sales are genuine
The receivables are in existence and are collectible
Provisions for doubtful debts are adequately provided.

LEONARDO DA VINCI

NATURE OF REVENUE AND
RECEIVABLES

Throughout the cycle, data travels via a variety of accounts, including sales, cash
receipts, accounts receivable, and sales returns and allowances.

According to ISA 315, para 11, the auditor must gain a thorough awareness of the
entity and its surroundings in order to comprehend the types of transactions,
account balances, and disclosures that should be expected in the financial
statements.

THE ACCOUNTING SYSTEM AND
CONTROL ACTIVITIES

STRENGTH-BASED

Because sales and receivable accounts affect the entire organisation, it is critical to implement
proper control actions. The revenue cycle's three key components are:

·Sales,
·Cash receipts
·Sales adjustments.

Customer’s Orders Credit Approval Issuing Goods

The first transaction trail of To avoid making credit sales to ·The accepted sales orders will
documentary proof is a sales customers with poor credit be sent to the warehouse, where
order. risks, credit approval is a storekeeper will keep track of
The order's legitimacy must be delegated to a separate goods and prepare them for
verified to guarantee that no department from the sales distribution.
fraudulent transactions are department. ·A shipping document, such as a
generated or that sales The credit sales amount to the bill of lading, is enclosed with
transactions occur. customer is only approved by the shipment of goods (pre-
Audit objective: occurrence the manager up to the allowed numbered).
credit limit. Audit objective: cut-off,
Audit objective: accuracy and occurrence, completeness
valuation and allocation.

Invoicing Customers Recording the Sales Collection of Cash Sales
Controls should be established in and Receivables
After the customer receives the recording sales to ensure that:
items, the accounting or finance ·All sales transactions are The following functions are involved
department will produce and send a recorded (audit objective: in the cash receipts from sales and
sales invoice. Controls should be put completeness) receivables process:
in place to ensure: ·No overstatement of or
fictitious sales (audit ·Receiving cash
All customer shipments are duly objective: occurrence). ·Depositing cash in bank
invoiced and sent. (audit The amounts of sales should Recording the receipt
objective: completeness) be recorded accurately
There will be no fraudulent sales (audit objective: accuracy) Adjustments to Sales and
transactions or duplicate invoices In the proper period (audit Receivables
made or recorded. (audit objective: cut-off).
objective: occurrence) To verify the authenticity of transactions,
Invoice amounts are calculated controls over changes to sales and
correctly at an assigned price. receivables for discounts, sales returns
(audit objective: accuracy). and allowances, and accounts receivable
write-offs are critical. (audit objective:
occurrence).

DEVELOPING THE AUDIT PLAN

DEVELOPING THE AUDIT PLAN

UNDERSTANDING THE ENTITY TO IDENTIFY INHERENT RISKS

An awareness of the entity and its environment is critical for audit planning, as it aids in
identifying potential financial report misstatements.

Obtaining an Understanding of Internal Controls over Sales and
Receivables

By creating suitable and effective internal controls, inherent risks associated to sales and
receivables can be reduced.
The auditor should be familiar with sales and receivables controls.
The auditor can verify if sales and receivables internal controls are applied properly and
effectively.

DEVELOPING THE AUDIT PLAN

ASSESSING RISKS OF MATERIAL MISSTATEMENTS

Because revenue recognition is generally a high-risk area, the professional standards imply
that auditors should likely evaluate the possibility of material inaccuracy as a result of fraud.

Designing Further Audit Procedures

F· urther audit procedures
tests of controls
substantive procedures.
If auditors believe control risks are substantial, they should conduct more substantive
processes to gather the requisite audit evidence.

Test of Control

Substantive Procedures

DESIGNING
DISCLOSURE
SUBSTANTIVE
PROCEDURES PROCEDURES TO
ASCERTAIN ADEQUACY

OF THE ALLOWANCE
FOR BAD DEBTS

To verify that the The auditor should The auditor should know
procedures used to evaluate the possibility of the disclosure requirements
gather acceptable audit uncollectable receivables.
evidence to determine Management's process for of the account receivable
the existence of sales and estimating the allowance disclosure.
receivables transactions for bad debts should be
reviewed and tested by the
are effective.
auditor.

Substantive Procedures

Test of details of
Analytical procedures Test of details of
balances transactions

Concerned with Analytical procedures are Test of transactions are
obtaining evidence used to confirm used to corroborate test
about account expectations & performed of details of balances.
receivable balances. in 3 stages: The tests of transactions
Do not concerned are normally performed
about debit or credit To review the during an interim audit
transactions but the understanding of an & in the form of dual-
balance at the end of entity purpose tests.
the period. To determine any
focus on the fluctuations
adequacy of the To determine ratios
allowance for and trends
doubtful debts

Audit Objectives for the Auditor’s

Substantive Procedures

Sales
Receivables

To substantiate the occurrence of sales To substantiate the existence of receivables

To establish completeness of sales To establish completeness of receivables

To verify cut-off of sales transactions To determine whether the client has the right to
the receivables
To establish accuracy of sales transactions
To verify that the client established a proper
To ensure that the presentation and disclosure of valuation of receivables
sales are appropriate
To ensure that the presentation and disclosure of
the receivables are appropriate

AUDIT OF REVENUE CYCLE

The revenue cycle includes selling transactions that begin with receiving
orders from customers, delivering and billing to customers, and recording and
collecting accounts receivable. The revenue and receivables audit criteria are
concerned with obtaining adequate audit evidence for the transactions and
balances.
The most important things to look for while auditing sales and receivables are
the sales are neither understated nor overstated, and the sales are genuine,
the receivables are in existence and are collectible, and the provisions for
doubtful debts are adequately provided.

AUDIT OF REVENUE CYCLE

Throughout the cycle, data travels via a variety of accounts, including sales,
cash receipts, accounts receivable, and sales returns and allowances.
According to ISA 315, para 11, the auditor must gain a thorough awareness of
the entity and its surroundings in order to comprehend the types of
transactions, account balances, and disclosures that should be expected in
the financial statements.
Because sales and receivable accounts affect the entire organization, it is
critical to implement proper control actions. The revenue cycle's three key
components are sales, cash receipts, and sales adjustments.

AUDIT OF REVENUE CYCLE

The audit plan will begin by gaining an understanding of internal controls over

sales and receivables, assessing the risks of material misstatements, and

designing additional audit procedures. It is critical to conduct tests of

controls, such as the Test of Operating Effectiveness and the Test of
Design Effectiveness.
While substantive procedures included DESIGNING SUBSTANTIVE
PROCEDURES, PROCEDURES TO ASCERTAIN ADEQUACY, and
DISCLOSURE. Furthermore, the types of substantive procedures are
ANALYTICAL PROCEDURES, TEST OF DETAILS OF TRANSACTION, and TEST
OF DETAILS OF BALANCES.

WELLS FARGO SALES SCANDAL

- Considered one of the Big Four Banks in the
United States.

- From 2002 to 2016, illegal practices were
carried out by thousands of Wells Fargo
employees in order to make more money for
the bank and meet unrealistic sales targets
which enable them to reach quotas and qualify
for incentive bonuses.

ILLEGAL Existing customers were encouraged to open additional accounts and buy
other financial products.
SALES They opened millions of accounts and half a million credit cards in customers’
PRACTICE names without their authorization,
WELLS Fake pin numbers and email addresses were used in order to sign customers
FARGO up for services without their knowledge,
Signed unwitting account holders up for credit cards and bill payment
programs,
Created fake personal identification numbers,
Secretly transferred customers’money from existing accounts and
Altering customers' contact information to avoid detection.
Collecting millions of dollars in fees for bank accounts, debit cards and other
products that customers neither asked for nor needed and concealing these
overcharges through various misrepresentations and deceptive practices.
Records fictitious revenue through a false billing scheme.

ATTRIBUTES - The revenue transaction is recorded through the billing
OF FALES system.
BILLING
SCHEME - The revenue transaction is recorded through the use of
fictitious customers and the use of real customers.

- Management obtains, creates, or alters documents to
provide the illusion that the customer ordered the
product or services.

- The realization of the receivable is concealed.

CONSEQUENCES AGREED TO PAY $3 BILLION TO SETTLE
THE CHARGES

The attorney said the $3 billion penalty is appropriate given
the size, scope, and duration of Well Fargo's illegal conduct
and the bank managers were aware of the illegal conduct as
early as 2002 but allowed it to continue until 2016.

The bulk of the fine will go to the U.S. Treasury, while $500
million will go to the Securities and Exchange Commission
(SEC) to be distributed to investors.

5,300 EMPLOYEES FIRED
FORMER HEAD BANNED FROM BANKING
MADE SIGNIFICANT CHANGES TO ITS
MANAGEMENT AND BOARD OF
DIRECTORS

CONSEQUENCES

FAILURE OF LEADERSHIP AT MULTIPLE
LEVELS WITHIN THE BANK

- Wells Fargo traded its hard-earned reputation for short-
term profits and harmed its customers along the way

- Wells Fargo reported a net income of $2.9 billion in its
most recent quarter

NON- AUDIT
SERVICES

NON-AUDIT SERVICES OR CERTAIN
SERVICES THAT STATUTORY AUDITOR OR
AUDIT FIRM IS NOT ALLOWED TO RENDER

NON- ACTUARIAL SERVICES
AUDIT
SERVICES Actuarial service is one way that corporations determine,
assess, and plan for the financial impact of risk.

INVESTMENT ADVISORY SERVICES

Investment Advisory Services means investment
management or investment advisory services, including any
subadvisory services, that involve acting as an “investment
adviser” within the meaning of the Investment Advisers Act.

INVESTMENT BANKING SERVICES

Investment banking is a specific division of banking related
to the creation of capital for other companies, governments,
and other entities.

NON- ACCOUNTING AND BOOKKEEPING SERVICES
AUDIT
SERVICES An auditor should not assist his client in preparing financial statement
whatsoever but may advice his client on some issues such as how to
convert the financial statements of subsidiaries into parent's currency
correctly during consolidation

BROKER-DEALER SERVICES

An auditor is not allowed to advise a client on whether to buy or sell
client’s securities. Additionally, an audit firm is not allowed to take
investment decisions on behalf of the audit client

FINANCIAL INFORMATION SYSTEMS DESIGN AND
IMPLEMENTATION

Includes the design and implementation of information system for a
client in such a way that either the data will be a part of the financial
statement or the system will produce important information for
preparing the financial statement.