CHAPTER 11 Auditing the Revenue Process

CHAPTER 11
Auditing the Revenue Process
Learning Objectives
1.Explain the nature of the revenue process.
2.Evaluate audit planning information and its effect on the assessment of inherent risk in the revenue process.
3.Evaluate control activities for credit sales transactions.
4.Evaluate control activities for cash receipt transactions.
5.Evaluate control activities in a “paperless” revenue system.
6.Evaluate control activities for sales adjustment transactions and revenue process disclosures.
7.Determine how to design and perform tests of controls in the revenue process and connect the results of control testing to audit strategy.
8.Determine which substantive procedures to perform in the revenue process and how to evaluate their results.
ANSWERS TO MULTIPLE-CHOICE QUESTIONS
1. B
LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: None
2. D
LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: None
3. B
LO 2 BT: C, Difficulty: Moderate, TOT: 2 min., AACSB: None, AICPA AC: None
4. D
LO 2, BT: AN, Difficulty: Moderate, TOT: 2 min., AACSB: Analytics, AICPA AC: Risk Assessment, Analysis and Management, PC: Decision Making
5. C
LO 2, BT: C, Difficulty: Moderate, TOT: 2 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management, PC: Decision Making
6. C
LO 3, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Systems and Process Management, PC: Decision Making 7. A
LO 3, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Systems and Process Management, PC: Decision Making
8. B
LO 3, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Systems and Process Management, PC: Decision Making
9. D
LO 4, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Systems and Process Management, PC: Decision Making
10. B
LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Systems and Process Management, PC: Decision Making
11. A
LO 6, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA AC: Systems and Process Management, PC: Decision Making
12. D
LO 7, BT: AN, Difficulty: Moderate, TOT: 2 min., AACSB: Analytics, AICPA AC: Risk Assessment, Analysis and Management, PC: Decision Making
13. A
LO 8, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA PC: Decision Making
14. C
LO 8, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: None, AICPA PC: Decision Making ANSWERS TO REVIEW QUESTIONS
R11.1 If cash receipts are not recorded accounts receivable will be overstated. The failure to record a cash receipt also results in a failure to reduce a receivable and an understatement of cash.
LO 1, BT: AP, Difficulty: Easy, TOT: 3 min., AACSB: Analytics, AICPA AC: Measurement, Analysis and Interpretation, PC: Decision Making
R11.2
1.Revenue is recorded before goods are shipped due to a cutoff problem. For example, an invoice might be prepared before goods are actually shipped.
2.Revenue is recognized prematurely because the customer is billed for the full order, even though some items ordered are back ordered and not shipped yet.
3.Management books revenue and receivables prematurely in order to meet sales targets. This may be done though a journal entry or by sending an invoice to a customer before goods are shipped.
LO 1, BT: AP, Difficulty: Easy, TOT: 10 min., AACSB: Analytics, AICPA AC: Measurement, Analysis and Interpretation, PC: Decision Making
R11.3 For oil and gas field machinery equipment, knowing that they are tied to extractive industries that are dependent on oil prices and they depend on opportunities for export and competitive pricing (worldwide), the risk of material misstatement concerns can be significantly affected by:
1.Terms of sales and moving inventory during a period of low oil prices,
2.Sales may be dependent on policies (and politics) of foreign governments and oil prices, or decisions made by foreign countries to invest in or support oil and gas extraction,
3.Collection risk associated with selling to foreign entities (and political disruption).
For a retail grocer, sales are relatively straightforward. However, with numerous products where product differentiation is difficult, retailers are improving margins by leasing space to banks and coffee companies. Grocers also have intense competition from club stores and click and pick up or delivery services, the risk of material misstatement concerns can be significantly affected by:
1.Sales may not be recorded, or cash may be taken by employees,
2.Receivables are usually related to pharmacy receivables from insurance companies.
LO 2, BT: AN, Difficulty: Easy, TOT: 10 min., AACSB: Analytics, AICPA AC: Measurement, Analysis and Interpretation, PC: Decision Making