Chapter 9: Auditing the Revenue CycleMANUAL PROCEDURESLEGACY SYSTEM PROCEDURESSlide 4BATCH CASH RECEIPTS SYSTEMS WITH DIRECT ACCESS FILESREAL-TIME SALES ORDER ENTRY AND CASH RECEIPTSSlide 7FEATURES OF REAL-TIME PROCESSINGMANAGEMENT ASSERTIONS AND REVENUE CYCLE AUDIT OBJECTIVESINPUT CONTROLSSlide 11Slide 12PROCESS CONTROLSACCESS CONTROLSPHYSICAL CONTROLSSlide 16OUTPUT CONTROLSSUBSTANTIVE TESTS OF REVENUE CYCLE ACCOUNTSSlide 19Slide 20Slide 21Slide 22Slide 23IS ControlsControls for Automated SystemsSlide 26Slide 27Slide 28Slide 29Slide 30Slide 31Chapter 9: Auditing the Revenue CycleIT Auditing & Assurance, 2e, Hall & SingletonChapter 9:Auditing the Revenue CycleIT Auditing & Assurance, 2e, Hall & SingletonIT Auditing & Assurance, 2e, Hall & SingletonMANUAL PROCEDURES Processing shipping orders4 copies of Sales Order to warehouse; packing slip, shipping notice, stock release, file copyLocate and “pick” goods using Stock Release; package them with packing slipReconcile documents and goods, sign Shipping Notice, prepare Bill of Lading – multiple copies [Figure 9-3]Transfer custody of goods (packing slip inside) and 2 copies of Bill of Lading to carrierRecord shipment in shipping logSend shipping notice to Billing Dept.File: Stock Release, 1 BOL, File CopyIT Auditing & Assurance, 2e, Hall & SingletonLEGACY SYSTEM PROCEDURESKeypunch batch of shipping notices Edit run program, correct any errorsField checksLimit testsRange testsPrice times quantity extensionsSort run on batches by AR account numberLegacy systems store records in sequential manner, usually tapeNext process is to “post” individual shipping notices to appropriate individual AR accountsAR update & billing run [Figure 9-4] Updates AR file becomes new AR fileBilling would be printing invoices to be mailedSales journal file or printoutJournal voucher for AR [DR] and sales [CR]IT Auditing & Assurance, 2e, Hall & SingletonLEGACY SYSTEM PROCEDURESRe-sort by inventory item {why?}Same reason; but this process is to update Inventory ItemsInventory update run [Figure 9-5]Reduce quantity on hand for items shipped, generate a new Inventory fileCompare “On Hand” quantity with “Reorder Point” to identify items needing replenishment; file or printout Journal voucher for Cost of Goods Sold [DR] and Inventory [CR]Sort journal entries by GL #Run general ledger updateManagement reportsIT Auditing & Assurance, 2e, Hall & SingletonBATCH CASH RECEIPTS SYSTEMS WITH DIRECT ACCESS FILESSee Figure 9-6Discrete events that naturally fit the batch approachUpdate Procedures Mail RoomReceives checks and Remittance Advices.Separates checks from Remittance AdvicesPrepares a Remittance List – multiple copiesCopy of Remittance List and checks go to Cash Receipts Dept.Remittance Advices and copy of Remittance List go to AR Dept.Last copy of Remittance List to Controller’s OfficeIT Auditing & Assurance, 2e, Hall & SingletonREAL-TIME SALES ORDER ENTRY AND CASH RECEIPTSSee Figure 9-7Sales proceduresTransactions are processed as they occur, separately Credit check is performed online by the system If approved, system checks availability of inventory If available, system:Transmits electronic stock release to warehouse dept Transmits electronic packing slip to shipping dept Updates inventory file records for depletion Records sale in open sales order computer fileIT Auditing & Assurance, 2e, Hall & SingletonREAL-TIME SALES ORDER ENTRY AND CASH RECEIPTS Warehouse proceduresProduces hard copy of stock releaseClerk picks goods, sends them with a copy of stock release to shipping dept. Shipping proceduresReconciles goods, stock release, packing slip from system.Online, IS prepares Bill of Lading for shipment, and shipping notice for DP Dept. Select carrier and prepare goods for shipment, along with packing slip and Bill of LadingStock release form is filedIT Auditing & Assurance, 2e, Hall & SingletonFEATURES OF REAL-TIME PROCESSING Events DatabaseTraditional accounting does not have to exist in per se (in traditional form)General Ledger can be derived at any time from a compilation from the events database AdvantagesGreatly shortens the cash cycle of the firmCan give a firm a competitive advantage (e.g., managing inventory better)Real-time editing permits the identification of many kinds of errors as they occur, greatly reducing the efficiency and effectiveness of business processesReduces the amount of paper documentsElectronic audit trails are possible in real-time computer-based systemsIT Auditing & Assurance, 2e, Hall & SingletonMANAGEMENT ASSERTIONS AND REVENUE CYCLE AUDIT OBJECTIVES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 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  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 Rights & ObligationsDetermine organization has legal right to ARVERIFY accounts sold or factored have been removed from AR Valuation or AllocationDetermine AR balance stated in net realizable valueEstablish allocation for uncollectible accounts is appropriate Presentation and DisclosureVERIFY AR and revenues for period are properly described and classifiedIT Auditing & Assurance, 2e, Hall & SingletonINPUT CONTROLSPurposeEnsure creditworthiness of customersControl techniques vary considerably between batch systems and real-time systemsCredit authorization proceduresCredit worthiness of customerBatch and manual systems use credit dept.Real-time systems use programmed decision rules Testing credit proceduresVerify effective procedures existVerify information is adequately communicatedVerify effectiveness of programmed decision rules (test data, ITF)Verify that authority for making credit decisions is limited to authorized credit personnel/proceduresPerform Substantive Tests of DetailReview