Question

1. aExplain why it is important to understand the accounting and reporting requirements for an area that an auditor will be assigned to audit – use sales and collections as an example. Briefly explain FASB’s revenue recognition standard. b. Explain the basic processes involved in generating and document revenue transactions; and in collecting for revenue transactions. You can use an example to help you explain the process. As part of your explanation, also state which documents are used to detail the revenue and collections transactions in these processes

Answer 1

Independent auditor is engaged to render an opinion on whether a company’s financial statements are presented fairly, in all material respects, in accordance with financial reporting framework. The audit provides users such as lenders and investors with an enhanced degree of confidence in the financial statements. An audit conducted in accordance with GAASand relevant ethical requirements enables the auditor to form that opinion.

To form the opinion, the auditor gathers appropriate and sufficient evidence and observes, tests, compares and confirms until gaining reasonable assurance. The auditor then forms an opinion of whether the financial statements are free of material misstatement, whether due to fraud or error.

Some of the more important auditing procedures relating to sales, inventories and receivable include:

1. Inquiring of management and others to gain an understanding of the organization itself, its operations, financial reporting, and known fraud or error
2. Evaluating and understanding the internal control system
3. Performing analytical procedures on expected or unexpected variances in account balances or classes of transactions
4. Testing documentation supporting account balances or classes of transactions
5. Observing the physical inventory count
6. Confirming accounts receivable and other accounts with a third party

At the completion of the audit, the auditor may also offer objective advice for improving financial reporting and internal controls to maximize a company’s performance and efficiency.

FASB's STANDARD ON REVENUE RECOGNITION

Revenue is one of the most important measures used by investors in assessing a company’s performance and prospects. However, previous revenue recognition guidance differs in Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS)—and many believe both standards were in need of improvement.

On May 28, 2014, the FASB and the International Accounting Standards Board (IASB) issued converged guidance on recognizing revenue in contracts with customers. The new guidance is a major achievement in the Boards’ joint efforts to improve this important area of financial reporting.

Presently, GAAP has complex, detailed, and disparate revenue recognition requirements for specific transactions and industries including, for example, software and real estate. As a result, different industries use different accounting for economically similar transactions.

The objective of the new guidance is to establish principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The new guidance:

1. Removes inconsistencies and weaknesses in existing revenue requirements
2. Provides a more robust framework for addressing revenue issues
3. Improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets
4. Provides more useful information to users of financial statements through improved disclosure requirements, and
5. Simplifies the preparation of financial statements by reducing the number of requirements to which an organization must refer.

Process Involved in revenue accounting:

1. Sales Order processing
2. Billing to Customer – deciding the basis credit/cash
3. Shipping the goods
4. Cash receipts/ Collection

Common source documents:

1. a canceled check
2. invoice
3. cash register receipt
4. computer-generated receipt
5. credit memo for a customer refund
6. employee time card
7. deposit slip
8. purchase order