Auditing the Revenue Process

CHAPTER 10

AUDITING THE REVENUE PROCESS

Answers to Review Questions

10-1 FASB Statement of Financial Accounting Concepts No. 5, "Recognition and Measurement in Financial Statements of Business Enterprises" (CON5), requires that before revenue is recognized (recorded) it must be realized or realizable and earned. Revenues are realized when the products or services are exchanged for cash, a promise to pay cash, or other assets that can be converted into cash. Revenues are earned when the entity has substantially completed the earnings process, which generally means the product has been delivered or the service has been provided.

10-2 The credit function has the responsibility for monitoring customer payments. An aged trial balance of accounts receivable should be prepared and reviewed by the credit function. Payment should be requested from customers who are delinquent in making payments for goods or services. The credit function is usually responsible for preparing a report of customer accounts that may require write-off as bad debts. However, the final approval for writing off an account should come from an officer of the company who is not responsible for credit or collections.

10-3 When the client does not have adequate segregation of duties or if collusion is suspected, the possibility of a defalcation is increased. An employee who has access to both the cash receipts and the accounts receivable records has the ability to steal cash and manipulate the accounting records to hide the misstatement. This is sometimes referred to as lapping. When lapping is used, the perpetrator covers the cash shortage by applying cash from one customer's account against another customer's account. If the auditor suspects that this has occurred, the individual cash receipts have to be traced to the customers' accounts receivable accounts to ensure that each cash receipt has been posted to the correct account. If the cash receipt is posted to a different...