AUDITING THE

REVENUE CYCLE
 MANAGEMENT
ASSERTIONS AND
REVENUE CYCLE
AUDIT OBJECTIVES

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EXISTENCE /
OCCURRENCE
○ VERIFY AR balance represents
amounts actually owed as of
Balance Sheet date
○ Establish sales represents goods
shipped and/or services
rendered during period of
financials
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COMPLETENESS
○ Determine all amounts owed
organization are included in
AR
○ VERIFY shipped goods, services
rendered, and/or returns and
allowances for period are
included in financials
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ACCURACY
○ VERIFY revenue transactions are
accurately computed, based on
correct prices and quantities
○ Ensure AR subsidiary ledger,
sales invoice file, remittance file
are mathematically correct ..
And agree with GL accounts
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RIGHTS &
OBLIGATIONS
○ Determine organization
has legal right to AR
○ VERIFY accounts sold or
factored have been
removed from AR

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VALUATION or ALLOCATION
○ Determine AR balance
stated in net realizable value
○ Establish allocation for
uncollectible accounts is
appropriate

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PRESENTATION and
DISCLOSURE
○ VERIFY AR and revenues
for period are properly
described and classified

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REVENUE CYCLE
AUDIT OBJECTIVES,
CONTROLS, AND
TEST OF CONTROLS
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A. INPUT CONTROLS
-Designed to ensure that
transactions are valid,
accurate, and complete.

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A. INPUT CONTROLS
Input controls related to revenue cycle
operations:
✢ Credit Authorization Procedures
– only customer transactions that
meet the organization’s credit
standards are valid and should be
processed further

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A. INPUT CONTROLS
✢ Testing Credit Procedures
○ Determine that effective
procedures exists
○ Creating dummy accounts –
Test data or Integrated Test
Facility (ITF)
○ Performing substantive tests of
details
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A. INPUT CONTROLS
✢ Data Validation Controls – to detect
transcription errors in transaction
data before they are processed
✢ Testing Validation Controls
○ Testing the data editing controls
○ Reviewing error listings and
error logs

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A. INPUT CONTROLS
✢ Batch Controls – to manage high
volumes of transaction data through a
system
✢ Testing Batch Controls
○ Reviewing transmittal records of
batches processed
○ Reconciling transaction listings,
error logs, and logs of
resubmitted records
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B. PROCESS CONTROLS
- are computerized procedures for file updating
and restricting access to data.

✢ File Update Controls

✢ Transaction Code Controls
✢ Sequence Check Controls

- Tests of these controls provide the auditor with

evidence relating to the assertions of existence,
completeness, and accuracy.
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C. ACCESS CONTROLS

- Prevent and detect unauthorized

and illegal access to the firm’s
assets.

- In the absence of controls,

invoices can be deleted, added,
or falsified.
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D. PHYSICAL CONTROLS
✢ Segregation of Duties
✢ Supervision
✢ Independent Verification

- Inadequate segregation of duties and

the lack of effective supervision and
independent verification can result in
fraud and material errors.
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E. OUTPUT CONTROLS
- Designed to ensure that
information is not lost,
misdirected, or corrupted and
that system processes function
as intended.

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E. OUTPUT CONTROLS
Examples of Audit Trail Output Controls:
✢ A/R Change Report
✢ Transaction Logs
✢ Transaction Listings
✢ Log of Automatic Transactions
✢ Unique Transaction Identifiers
✢ Error Listing
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Substantive Tests of
Revenue Cycle
Accounts
Determine the nature,
timing, and extent of
substantive tests using the
auditor’s assessment of
inherent risk, unmitigated
control risk, materiality
considerations, and the need
to conduct the audit in an
efficient manner.

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✢ What are some
substantive tests of
revenue?

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What are some substantive
tests of revenue?
Occurrence Completeness Accuracy
Have the Have all Have
transactions transactions been transactions
occurred and recorded? been
pertain to the accurately
entity? recorded?

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What are some substantive
tests of revenue?

Cutoff Classification
Have transactions been Have transactions been
recorded in the correct recorded in the proper
accounting period? accounts?

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Substantive Tests of Revenue for
Occurrence, Accuracy, and
Valuation
✢ Vouch recorded sales transaction back to
customer order and shipping document
✢ Compare quantities billed and shipped
with customer order
✢ Special care should be given to sales
recorded at the end of the year
✢ Scan sales journal for duplicate entries
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Substantive Tests of Revenue
Cutoff Tests
✢ Can be performed for sales, sales returns,
cash receipts
✢ Provides evidence whether transactions
are recorded in the proper period
✢ Cutoff period is usually several days
before and after balance sheet date
✢ Extent of cutoff tests depends on
effectiveness of client controls
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UNDERSTANDING THE DATA

 The auditor must verify that he or she is

working with the correct version of the file to be
analyzed.
 Most sequential files and relational database
tables can be directly read by the ACL.
 Complex file structures may require “flattening”
before they can be analyzed.
 The auditor must verify that the correct
version of the original file was used and that
all relevant records from the original were
transferred to the copy for analysis.
File Structures
✢ Customer File – contains address and
credit information about customers
✢ Customer’s Purchase Order File –
contains request for merchandise by a
customer.
✢ Sales Order File – contains description,
quantity, and related information for
goods ordered by a customer.
✢ Sales Invoice File – contains summary
data for each invoice.
File Structures
✢ Line Item File – contains a record of every
product sold.
✢ Inventory File – contains quantity, price,
supplier, and warehouse location data for each
item of inventory.
✢ Shipping Log File – contains a record of all
sales orders shipped to customers.
✢ Credit Memo File – file indicating a reduction
in the amount due from a customer because of
returned goods or an allowance granted.
File Preparation Procedures
✢ Preliminary step : Each file needs to be defined.
○ Physical location – specifies the name
and where it resides
○ Structure – in terms of length of each
field and the data type contained in each
field
✢ File definition is saved under a unique name.
✢ All future file access is accomplished by simply selecting the
file definition from an ACL menu.
✢ ACL automatically locates the file and presents it on
screen.
TESTING THE ACCURACY AND
COMPLETENESS ASSERTIONS
ANALYTICAL REVIEW of account balances often
precedes substantive tests of details.
○ Provides the auditor with an overall
perspective for trends in sales, cash
receipts, sales returns, and accounts
receivable.
○ Provides assurance that transactions
and accounts are reasonably stated and
complete
○ May permit the auditor to reduce
substantive tests of details.
COMPLETENESS
Controls
1. Prenumbered shipping
documents accounted for
to determine that a sales
invoice is prepared for all
shipments.
Tests of Controls
1. The auditor can observe
the client performing the
procedure or select a
sample of shipping orders
and examine the invoice
that bills the sale.
COMPLETENESS
Controls
2. Prenumbered sales
invoices are accounted for
to determine that all sales
are recorded.
Tests of Controls
2. The auditor can select a
sample of sales invoice
copies to trace into the
sales journal.
COMPLETENESS
Controls Tests of Controls
3. Procedures to ensure 3. The auditor should
timely recording if sales inquire how procedures
and proper cut-off are are followed, observe
established. procedures being followed
and inspect report on the
last shipments that the
shipping clerk sends to the
billing clerk.
 Substantive tests that
can be performed using
ACL
1.REVIEW SALES INVOICES FOR
UNUSUAL TRENDS AND
EXCEPTIONS
• Scanning data files for unusual transactions and account
balances

• ACL’s stratify feature – groups data into predetermined

intervals and counts the number of records that fall into
each interval.

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2.REVIEW SALES INVOICE AND
SHIPPING LOG FILES FOR MISSING
AND DUPLICATE ITEMS

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✢ this may be evidence of over- or understated sales
and accounts receivable
✢ ACL is capable of testing a designated field for out-
of-sequence records, gaps in sequence numbers,
and duplicates for the entire file

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3.REVIEW LINE ITEM AND
INVENTORY FILE FOR SALES
PROCESS ACCURACY
✢ -pricing inconsistency in such setting may indicate a
computer program error or the use of obsolete
pricing data

✢ - Using the ACL features, the auditor can calculate

the total price variance and make a determination as
to its materiality, if material, it is a need to be
pursued with the management

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TESTING FOR
UNMATCHED RECORDS

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✢ 1. Value of the Item Number is incorrect and does not
match the Inventory record
✢ 2. Presence of Inventory records in the unmatched file
means that there is no corresponding records in the
Line Item file

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Testing the Existence
Assertions

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Confirmation of Accounts Receivables
✢ Auditors should request confirmations of accounts
receivable except in the following three situations:
✢ (1) accounts receivable are immaterial;
✢ (2) based on a review of internal controls, the auditor
has assessed control risk to be low; or
✢ (3) the confirmation process will be ineffective.

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Confirmation

✢ is the process of obtaining information from

third parties about the account balance.

✢ is a good source of evidence about the

existence of the accounts receivable.

✢ Should be controlled by the auditor

1. Select the accounts to confirm

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2. Prepare confirmation requests

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2 Types of Confirmation Request
Positive
-addressed to a customer
requesting that it send
directly to the auditor
confirmation of whether the
balance stated on the
confirmation request is
correct or incorrect.
Negative
-addressed to the customer
and requests a response
only if the customer
disagrees with the stated
amount on the confirmation
request.
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 3. Evaluate and control the
responses
When a response is received from a confirmation
request indicating disagreement with the amount owed, the
auditor should investigate the reason the disagreement. If
there are a number of disagreements or the disagreements
appear to be significant, the auditor should reconsider the
original assessment of the level of inherent and control risk.

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Testing the
Allocation/Valuation
Assertion
✢ Auditor’s objective:
to corroborate or refute that accounts receivable are stated
at net realizable value

✢ Key issues for auditors to resolve:

-Whether allowance for doubtful accounts reasonable
compared to prior years and based on composition of AR
portfolio
-Review past-due balances

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THANK YOU!

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REPORTERS:

 MARIA LARA RHODORA CRUZ

 APRIL MAE MAPUTE
 DONNA JANE DELMIGUEZ
 ERICA VIOLA TOREJA
 MARIA TERRISA KATE BUENO
 SHANIA JOYCE GONZALES
REFERENCES:

• Cabrera, Ma. Elenita B., Cabrera, Gilbert Anthony B., Applied Auditing
• http://www.auditcorner.com/2015/05/information-system-audit-revenue-
cycle.html?m=1
• http://www.cengage.com/accounting/book_content/0324375581_rittenberg/Final_
PPts/6thRittenbergCh11a.ppt

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