Chapter 18 Auditing Accounts Receivable and Related Revenue Cycle Accounts.docx

Chapter 18 Auditing Accounts Receivable and Related Revenue Cycle Accounts.docx

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Chapter18AuditingAccountsReceivableandRelatedRevenueCycleAccounts

BrowseLocation:

UnitedStates\PwCMaterial\Montgomery'sAuditing,TwelfthEdition\Part3:

AuditingSpecificAccounts

PublishDate:

25June,2001

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18

AuditingAccountsReceivableandRelatedRevenueCycleAccounts

18.1AUDITOBJECTIVES   

18.2IDENTIFYINGINHERENTRISKS   

18.3ANALYTICALPROCEDURES   

18.4SUBSTANTIVETESTSOFDETAILS   

（a）ControlRiskAssessmentandtheNature,Timing,andExtentofSubstantiveTests,   

（i）EarlySubstantiveTesting,   

（b）CutoffTestsofShipmentsandCollections,   

（c）ConfirmingAccountsReceivable,   

（d）ConfirmationProcedures,   

（i）SelectingAccountsforConfirmation,   

（ii）DesigningtheConfirmationRequest,   

（iii）Positivevs.NegativeForms,   

（iv）ProcessingConfirmationRequests,   

（v）EvaluatingtheResultsofConfirmationProcedures,   

（e）Lapping,   

（f）TestsofValuation,   

（i）ReviewingtheAgedTrialBalance,   

（ii）EarlyTestsofValuation,   

（iii）OtherProceduresRelatedtotheValuationObjective,   

（g）TestsofRightsandObligations,andPresentationandDisclosure,   

（h）OtherSubstantiveTests,   

18.5AUDITINGPROCEDURES:

SPECIALCONSIDERATIONSFORPARTICULARTYPESOFREVENUES   

（a）CashSales,   

（b）Interest,Rents,andSimilarFixedPaymentsfortheUseofProperty,   

（c）Royalties,ProductionPayments,andSimilarVariableRevenues,   

（d）GiftsandDonations,   

（e）DeferredIncomeorUnearnedRevenue,   

（f）RevenuesfromLong-TermContracts,   

18.6SPECIALAUDITINGCONSIDERATIONSFORNOTESANDOTHERRECEIVABLES   

Thischapterdiscussessubstantiveteststhattheauditormayusetoachievetheauditobjectivesrelatedtorevenuecycleaccounts,principallyaccountsreceivableandrevenues.Theauditstrategythatdeterminesthenature,timing,andextentofsubstantivetestsforeachaccountbalanceandclassoftransactionsintherevenuecycleisbasedprimarilyontheauditor'sidentificationofinherentrisksandassessmentofmaterialityandcontrolriskrelatingtospecificauditobjectives,andonefficiencyconsiderations.

18.1AUDITOBJECTIVES

SpecificauditobjectivesapplicabletoaccountsintherevenuecyclearedescribedinFigure18.1.

Figure18.1AuditObjectivesforRevenueCycleAccounts

Completeness   

Accountsreceivablerepresentallamountsowedtotheentityatthebalancesheetdatearisingfromrevenuetransactions.

Unearnedrevenuesrepresentallamountsreceivedforwhichshipmentshavenotbeenmadeandserviceshavenotbeenrendered.

Allshipmentsmadeandservicesrenderedduringtheperiodcoveredbythefinancialstatementsandallreturnsandallowancesarereflectedinthefinancialstatements.

Accuracy    

Revenuetransactionsarebasedoncorrectpricesandquantitiesandareaccuratelycomputedandclassifiedintheappropriategeneralledgerandaccountsreceivablesubsidiaryledgeraccounts.

Theaccountsreceivablesubsidiaryledgerismathematicallycorrectandagreeswiththegeneralledger.

Unearnedrevenuesrepresentthecorrectamountreceivedforshipmentstobemadeorservicestoberenderedinfutureperiods.

Existence/Occurrence   

Recordedaccountsreceivablerepresentamountsowedtotheentityatthebalancesheetdate.

Unearnedrevenuesrepresentamountsreceivedbytheentityforfuturesalestransactions.

Recordedrevenuetransactionsrepresentgoodsactuallyshippedorservicesactuallyrenderedduringtheperiodcoveredbythefinancialstatements.

CutoffRevenuetransactions,cashreceipts,andreturnsandallowancesarerecordedintheproperperiod.

Valuation/Allocation   

Accountsreceivablearestatedatnetrealizablevalue（thatis,netofappropriateallowancesforuncollectibleaccounts,discounts,returns,andsimilaritems）.

Revenueisrecognizedonlywhenappropriateaccountingrecognitionandmeasurementcriteriaaremet.

RightsandObligations

Accountsreceivablearelegalrightsoftheentityatthebalancesheetdate（thatis,customeraccountsthathavebeensoldorfactoredareexcludedfromtheaccountsreceivablebalance）.

Unearnedrevenuesreflectamountsreceivedforwhichtheentityisobligatedtoprovidefutureshipmentsorservices.

Presentationand

Disclosure

Accountsreceivable,revenues,unearnedrevenues,andrelatedaccountsareproperlydescribedandclassifiedinthefinancialstatements.

Accountsreceivablepledgedascollateralareproperlydisclosed.

Concentrationsofcreditriskarisingfromaccountsreceivableareproperlydisclosed.

Improperrevenuerecognitioncontinuestobeasignificantauditrisk.Asaresult,theAICPAhasissuedtwodocumentstoprovideguidancetoauditors-PracticeAlert98-3inNovember1998andAuditIssuesinRevenueRecognitioninJanuary1999.Inaddition,inDecember1999,theSecuritiesandExchangeCommissionissuedStaffAccountingBulletinNo.101,RevenueRecognitioninFinancialStatements,toprovideguidanceonapplyinggenerallyacceptedaccountingprinciplesinthisarea.ThePracticeAlerthighlightsindicationsofheightenedriskofimproper,aggressive,orunusualrevenuerecognitionpracticesandpresentsguidanceonwaysauditorscanreducetheriskoffailingtodetectthepresenceofsuchpractices.Figure18.2presentsalistofpracticesthatshouldalerttheauditortotheneedforcloseattentiontorevenueaccounts.

Asnotedonpage18·5ofthemainvolume,understandingtheentity'sbusinessandindustryandthetransactionsintowhichitentersisthefirststepinreducingauditriskrelatingtorevenuerecognition.AuditIssuesinRevenueRecognitionlistsmattersthatshouldbeincludedintheauditor'sunderstandingoftheentity'srevenuecycle,asfollows:

∙Thetypesofproductsandservicessold

∙Whetherseasonalorcyclicalvariationsinrevenuemaybeexpected

∙Thecustomarymarketingandsalespoliciesfortheentityandtheindustry

∙Policiesregardingpricing,salesreturns,discounts,extensionofcredit,andnormaldeliveryandpaymentterms

∙Who,particularlyinthemarketingandsalesfunctions,handlesprocessesaffectingrevenues,includingorderentry,extendingcredit,andshipping

∙Whethertherearecompensationarrangementsthatdependontherecordingofrevenue（e.g.,whethersalespeoplearepaidcommissionsbasedonsalesinvoicedorsalescollected,andthefrequencywithwhichsalescommissionsarepaid）

Inperformingsubstantiveproceduresofcomplexorunusualrevenuetransactions,theauditorshouldconsidertheneedforspecificprocedurestoassesswhetherrevenuehasbeenrecognizedappropriately.Suchproceduresmayincludeinquiryofentitysales,marketing,andcustomerservicepersonnel;confirmingsalesterms,especiallyunusualagreementslike"billandhold"arrangements（wheresalesarebilledbeforedelivery）orsoftwarelicenses,or"side-agreements"（discussedlater）relatingtopaymenttermsorrightsofreturn;reviewingsalescontracts;andusingtheservicesofaspecialistincontractualagreements.Confirmationsmayhavetobecustomdesignedtoobtaininformationbeyondoutstandingbalances,suchaspaymentterms,rightofreturn,continuingobligationsonthepartoftheentity,andotherrisksretainedbytheentity.Theauditoralsomaywanttoconsiderincludingrepresentationsaboutrevenuerecognitionissuesinthemanagementrepresentationletter.Finally,theauditor'scommunicationtotheauditcommittee,discussedinChapter4ofboththemainvolumeandthisSupplement,shouldincludeissuesrelatedtorevenuerecognition,suchaschangesintheentity'spolicies,lackofinvolvementbyaccountingpersonnelinsalestransactionsorinmonitoringdealingswithdistributors,salesrecordedatornearperiod-end,andatypicalsalesterms.  

18.2IDENTIFYINGINHERENTRISKS

AsdiscussedinChapter8,theauditorobtainsorupdatesinformationaboutvariousaspectsoftheentityanditsbusinessinordertoidentifyinherentrisks.Receivablesandrelatedrevenuesaremorelikelytobeoverstatedornonexistentthanunderstatedorincompletebecauseattemptstoimprovefinancialstatementpresentationmayinvolveinadequatemanagementconsiderationofvaluationallowancesthatreducethecarryingamountofreceivablestotheirnetrealizablevalue,ortherecognitionofrevenuetransactionsbeforetheyhavebeenrealized.Therefore,substantivetestsintherevenuecycleconcentrateonseekingevidenceabouttheexistence,accuracy,andvaluationofreceivables,althoughthepossibilitythatreceivablesareincompleteorotherwiseunderstatedisnotignored.

Theauditorshouldunderstandtheentity'scustomerbaseforitsvariouslinesofbusiness,itscreditandcollectionpolicies,howchangesinitslinesofbusinessanditscreditandcollectionpoliciesaremanaged,andtheirimpactoninherentrisk.Asignificantelementofinherentriskinauditingreceivablesandrevenuesisthattheymaybeoverstatedthroughimproperrevenuerecognitionmethods,causedbyrecordingtransactionsthatdidnotoccur,impropercutoffs,ortheinappropriateselectionofaccountingprinciples-errorsorfraudrelatedtotheexistence/occurrence,cutoff,andvaluationobjectives.

Somerevenuerecognitionissuesinvolveaccountingforunusualorcomplextransactions;othersinvolveimproperaccountingforroutinetransactions.Theauditorshouldbeconcernedaboutrevenuetransactionsthattheentityhasenteredintothatincludecontingentsalesagreements,customerrightsofreturn,repurchaseagreements,orother"special"termsthatcallintoquestionthecollectibilityofthereceivableandeventhe