Question

revenue and collection cycle. Explain what the revenue and collection cycle is in your own words and describe two audit procedures you would do if you were auditing an organization and why you would do those procedures.

Answer 1

Revenue and collection cycle in a company repeating set of bussiness activities and processing operations associated with providing goods and services to the customers and the collection of payments of all those sales.

An efficient revenue and collection cycle is to be present in the organisation to maintain steady cash flow for a company.

Audit procedures used for revenue and collection cycle :-

1. Test control

2. Test of individual transactions

Reason for conducting of test control :-

An auditor test the controls you have setup for the sales cycle to determine how strong and reliable they are. If they are strong, the auditor can reduce the amount of transactions testing he must do. Common internal controls over the sales cycle include numbered sales invoices, purchase order authorisation for a certain limit and authorisation over receivables write-offs.

the auditor selects a random sample of transactions and examines the related purchase orders, invoices and customer statements. if the control being tested is numbered sales invoices, for example, the auditor ensures that all numbers in a section are accounted for and that none are missing. if the control is that all purchase orders are approved by management the auditor checks for a manager signature on each document. If control errors are found, the auditor increases the amount of transactional testing that will be conducted in the audit.

Reasons for conducting test of individual transaction :-

an auditor determines if the financial statement amounts of sales and account receivables are corrected by verifying individual transactions. account receivable balances are tested by sending confirmation letter to customers to obtain objective assurance that the balance is correct. the auditor also chooses sales transactions from the sales ledger and verify that there are legitimate sales receipts to backup the transaction. To test the accuracy of the sales figure, the auditor reviews of sales transactions in the ledger close to the financial statement date to ensure that the company only include sales prior to the date.

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