Question

For each of the following questions, use alternative sources to supplement facts from the text to support your answers. Please provide references for any source used. 1a. Describe the revenue and collection cycle, including typical source documents. 1b. Identify significant accounts and relevant assertions related to the revenue and collection cycle. 1c. Identify important internal control activities present in a properly designed system to mitigate the risk of material misstatements for each relevant assertion in the revenue and collection cycle. 1d. Give examples of tests of controls to test the operating effectiveness of internal controls in the revenue and collection cycle. 1e. Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about significant account balances at the end of the period.

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Answer 1

Revenue and collection cycle are most important factor for any organization . Revenue represnts that company provides goods and services to the customer and teh collection pf payment for those of sals . An efficient revenue and collection cycle is most important factor for any organization .

As per Internal control measurement , COSO implemented multiple internal control system to ensure efficent way of accounting revenue and collection cycle

Revenue department is responsible for receiving the customer order and preparing a sales order . Revenue department before preparing sales order send complete detail to credit department to check custimer credit worthiness

Shipping and delivery of goods - the order is shipped , a shipping documents is created and send to account receivable along with sales order

After acceptance or goods by customer , in this case , company has to follow revenue recognistion policy before recognised revenue and complete accounting in this matter . Company raise sales Invoice and accounted as " Account receivable " . Account receivable is responsible for taking sales order + shipping document +finally generating sales Invoice

Account receivable department maintain proper debtors ageing report and review the same frequently to understand about collection status from customer as well as any challenge to collect the money or need to make provision for the same

Internal control on sales

Company management to boost up companies performance , increase or recorded revenue at high level mainly during Quarter end and year end and reverse the same subsequently . Internal control will help us to understand about proper segregation duties , authorization process , reason for revenue reversal as well as credit note issued if any

Any organization , auditor used to do substantive and compliance testing to ensure that revenue has been accounted correctky . To ensure that company maintain all relevent documents , process in terms of revenue recognition , billing and collection of cash

Auditor do control test , Auditor used to send balance confirmation to customer to verify correctness of teh transaction . Auditor used to get assurance from the customer about balance confirmation ,

Management used to review collection policy process and number of days to collect the money from the date of Invoice If company diversified in nature and spread across Geography then they ned to do calculate average sales and collection ( in days ) from each product and each geography wise .

At present Auditor needs to verify and ensure that company is following ECL ( Expected credit loss ) concept while determining provision ( or determining credit loss) . they need to ensure that compmay maintain proper receivable management system in a systematic way and maintain accounting standard while recognizing revenue plus maintain collection cycle to manage working capital efficiently