Question

Explain the appropriate field work needed to review high-risk business transactions for cash and revenue.

1. What would you need to do in the field to investigate these?

2. Could you convey this information through charts or other supporting documentation?

Answer 1

Answer

Appropriate field work needed to review high - risk business transactions for cash and revenue is as discussed below:

1. Identify the significant accounts, disclosures, and relevant assertions in the revenue cycle

2. Identify and assess inherent risks of material misstatement in the revenue cycle

3. Identify and assess fraud risks of material misstatement in the revenue cycle

4. Identify and assess control risks of material misstatement in the revenue cycle

5. Describe how to use preliminary analytical procedures to identify possible material misstatements for revenue cycle accounts, disclosures, and assertions

6. Determine appropriate responses to identified risks of material misstatement for revenue cycle accounts, disclosures, and assertions

7. Determine appropriate tests of controls and consider the results of tests of controls for revenue cycle accounts, disclosures, and assertions

8. Determine and apply sufficient appropriate substantive audit procedures for testing revenue cycle accounts, disclosures, and assertions

9. Apply the frameworks for professional decision making and ethical decision making to issues involving the audit of revenue cycle accounts, disclosures, and assertions.

1. Investigations to be done for:

Process of: • Receiving a customer’s order • Approving credit for a sale • Determining whether goods are available for shipment • Shipping the goods • Billing the customers • Collecting cash • Recognizing effect of this process on other related accounts

• Significant accounts include revenue and accounts receivable • Evidence is obtained for each financial statement assertions • Relevance of assertions varies with accounts and clients • More relevant assertions: • Have risk of material misstatement • Require higher-quality audit evidence

• Requires information about: • Inherent risks at the: • Financial statement level • Account and assertion levels • Fraud risks • Feedback from audit team’s brainstorming session • Strengths and weaknesses in internal control • Results from preliminary analytical procedures

• Timing of revenue recognition - Important inherent risk related to revenue transactions • Following information is required to audit revenue cycle • Organization’s principal business • Earnings process and nature of obligations that extend beyond normal shipment of goods • Impact of unusual terms, and when title passes to customer

• Right of customer to return a product, as well as returns history • Contracts that are combinations of leases and sales • Proper treatment of sales transactions made with recourse or that have an abnormal or unpredictable amount of returns