After reading the material in this chapter, you should be able to: Understand why knowledge of an entity's revenue recognition policies is important to the audit, understand the revenue process, know the types of transactions in the revenue process and the financial statement accounts affected, be familiar with the types of documents and records used in the revenue process, | Chapter 10 Auditing the Revenue Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Revenue Recognition Revenue is defined as inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivery or producing goods, rendering services, or other activities that constitute the entity’s major or central operations. LO# 1 10- Overview of the Revenue Process Purchases Inventory Credit sales Account receivable Cash collection Purchases Inventory Cash sales Cash Sale Credit Sale LO# 2 10- Types of Transactions and Financial Statement Accounts Affected The revenue process affects numerous accounts in the financial statements. The most significant accounts are: LO# 3 10- Types of Documents and Records LO# 4 10- The Major Functions LO# 5 10- Key Segregation of Duties LO# 6 10- Inherent Risk Assessment The four inherent risk factors that may affect the revenue process are: Industry-related factors. The complexity and contentiousness of revenue recognition issues. The difficulty of auditing transactions and account balances. Misstatements detected in prior audits. LO# 7 10- Control Risk Assessment Understand and document the revenue process based on a reliance strategy. Plan and perform tests of controls on revenue transactions. Set and document the control risk for the revenue process. LO# 8 10- Control Activities and Tests of Controls – Revenue Transactions Assertions about Classes of Transactions and Events for the Period under Audit LO# 9 10- Revenue Transactions LO# 9 10- Cash Receipts Transactions LO# 9 10- Control Activities and Tests of Controls – Sales Returns and Allowances Sales returns and allowances is usually not a material amount in the financial statements. However, credit memoranda that are used to process sales returns can also be used to cover an unauthorized shipment of . | Chapter 10 Auditing the Revenue Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Revenue Recognition Revenue is defined as inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivery or producing goods, rendering services, or other activities that constitute the entity’s major or central operations. LO# 1 10- Overview of the Revenue Process Purchases Inventory Credit sales Account receivable Cash collection Purchases Inventory Cash sales Cash Sale Credit Sale LO# 2 10- Types of Transactions and Financial Statement Accounts Affected The revenue process affects numerous accounts in the financial statements. The most significant accounts are: LO# 3 10- Types of Documents and Records LO# 4 10- The Major Functions LO# 5 10- Key Segregation of Duties LO# 6 10- Inherent Risk Assessment The four inherent risk factors that may
