REVENUE AND RECEIVABLES AUDIT PROGRAM
REVENUE & RECEIVABLES ABC Corporation Work papers prepared by: Work papers reviewed by: Audit Program approved by: I. SCOPE/AUDIT OBJECTIVES: A. The overall objective of the audit is to evaluate the revenue cycle to ensure that revenue, and receivable are adequately supported and authorized; transaction processing controls are adequate; segregation of duties throughout the revenue cycle is appropriate; and internal controls are satisfactory. We will also evaluate adherence to sound business practices and procedures, but primary emphasis is on reviewing internal controls for effectiveness and utilization, and examining standards and procedures for policy compliance. Commissions are tested at both order acceptance and at revenue recognition if applicable specific objectives by area are: 1. Revenue Recognition: Contractual obligations are met prior to recognition of revenue. Revenue recognition practices for advance billings, maintenance/software/service fees, and multi-month contracts are proper. 2
Revenue analysis and recording of revenue by type, source, method of payment, and product line is correct. 2. Delivery/Shipments and Billings: Shipments to customers are properly authorized and documented. Physical description and actual quantities of goods shipped are verified. Delivery receipts are signed by customer. There are closed loop control over billings. 3. Accounts Receivable: Controls allow only authorized entries to accounts receivable records. Documents are numerically controlled. Credit memos, write-offs, and other adjustments require management approval. A/R records are properly aged and analysis allows management review and proper calculation of required reserves. Days Revenue Outstanding (DRO) is properly calculated. 4. Collections: Controls over collection activities are effective. 5. Commissions and Bonus Payments: Payments are made in accordance to contractual obligations and are properly supported by appropriate records and that commission and bonus payments are accurately computed. 6. General Ledger: Revenue, collections, and adjustments are properly accumulated, classified, and summarized in the accounts. General ledger entry controls ensure completeness and authorization. Accounts receivable subsidiary records are reconciled regularly to the general ledger. 7. Segregation of Duties: The order entry, credit, shipping, and billings functions are segregated from accounts receivable, general ledger, and cash functions. Shipping is segregated from order entry and billing. 3
Accounts receivable record keeping is segregated from general ledger functions. Cash functions are segregated from shipping, billing, accounts receivable and general ledger functions. II. REFERENCE: Trade Receivables Trade Receivables - Allowance Trade Receivables - Credit & Collection Revenue Revenue Recognition Revenue - Right of Return/Price Concessions Maintenance Revenue Worldwide Transfer Prices Use of Uniform Chart of Account Internal Accounting Controls - Revenue & Receivables Policy Issue Date III. UNIFORM CHART OF ACCOUNT COVERAGE: A/R Trade - Accruals Installment Receivables A/R Maintenance A/R Annual Maint. H/W UCA 4
A/R Annual Maint. S/W Allowance for Doubtful Accounts A/R Allowance - Installments A/R Allowance - Maintenance Accrued Commissions Accrued Guarantee - System Maint. Accrued Guarantee Credit Sales and Use Tax Advance Maintenance Receipts Deferred Warranty Income Deferred maintenance - H/W Annual Deferred maintenance - S/W Annual Accrued Royalties IV. AUDIT PROCEDURES/ANALYTICAL REVIEW: Performed By Work paper Reference A. General Control Review/Segregation of Duties 1. Meet with management to obtain additional perspective and expectations. Perform appropriate analytical review of practices and procedures. 2. Review and document procedures via flowcharts and/or narratives. Consider 5
controls to ensure: access to invoicing and credit memo processing functions and related data is restricted, goods/services are invoiced at authorized terms and prices, all invoice and credit memo data is completely and accurately entered for processing, invoices are completely and accurately prepared as to quantities, prices, terms, and extensions, invoices and credit memo data is matched with orders and shipment/performance data, and with receiving data for goods returned, that rejected transactions are isolated and corrected in a timely manner, invoice adjustments and credit memos data is recorded in customer accounts, invoice and credit memo data is completely and accurately accumulated in the underlying financial records, revenue and credit memo data is completely and accurately recorded in the proper period. 3. Adjust the scope and/or the emphasis of the review based on your review and obtain 6
agreement with local management s expectations. V. FUNCTIONAL TESTS/VERIFICATION OF CONTROLS: Performed By Work paper Reference B. Revenue Tests 1. Judgmentally select a sample of invoices and credit memos from the invoicing reports and/or from order testing. All vocations should be considered. The sample should be skewed towards high dollar values. Record pertinent information, such as: Sales Order Number, Customer, Quantity, Lead equipment and/or service performed, and Value 2. Obtain and record pertinent data as needed for invoice tests and later commission tests, such as: Revenue Book Date Salesman number, Commissions paid/due, 7
P.O. Number and Date or Contract Number, Equipment movement (Shipper) Number and quantity shipped and/or delivery receipt number. Invoice Number. 3. Review each with the order entry analysts and verify: Customer order/contract is signed an approved, Prices are per approved price book or appropriate approval of the price was obtained, Proof of delivery (customer signature of third party delivery service), Certificate signed by a technician, Evidence of order checklist review, Software license agreement is signed, Software order was placed, Performed By Work paper Reference Cancellations affected backlog, and Shipper and/or delivery receipt agrees to quantity invoiced. 8
4. Trace all pertinent data form the invoice to: Sale Journal, Accounts Receivable trial balance, Invoice register. 5. Unbundled revenue transactions is the preferred method of invoicing hardware and software. Identify bundled contracts and ensure the Country Manager s approval has been secured prior to selling goods and services on a bundled basis. 6. Revenue reversals should be processed within 3 months of invoice data and them only to correct administrative errors. After 3 months, adjustments due to administrative errors should be recorded as Sales Return and Allowances. Check a sample of reversals for correct procedures. 7. Losses on repossession should be written off to Losses on Accounts Receivable. Verify procedures. 8. If revenue is recognized upon delivery, it must be agreed to in the contract or subsequent written agreement from the customer and must be pre-staged. Verify procedure as appropriate. 9
9. If shipments are direct to customer, revenue must be recognized in accordance with company policy. Verify procedure. 10. Revenue for software services (billed custom work, maintenance, education, and publications) must be with contractual conditions and after invoicing. Performed By Work paper Reference 11. For multi-service contacts (repeat billings like billed custom work) revenue recognition for stage completion must be based on agreement and invoicing. If any, verify procedure. 12. Maintenance receivables are recognized in the month the contract commences. Verify procedure. 13. Maintenance revenue is recognized over the agreement period via charges to Current Liability-Maintenance Agreement- Unearned Revenue. Select sample and verify procedure. 14. Software maintenance contacts should be 10
treated the same as hardware maintenance contracts. If any, verify procedure. 15. Review support and/or reconciliations of revenue related Balance sheet accounts as appropriate. 16. Review Revenue accounts for proper classifications (i.e., new, used, rental, maintenance, etc. as well as export, domestic, and intercompany). C. Accounts Receivables Test Objective: Control allows only authorized entries to accounts receivable records. Documents are numerically controlled. Credit memos, write-offs and other adjustments require management approval. A/R records are properly aged and analysis allows management review and proper calculation of required reserves. 11
Performed By Work paper Reference 1. Obtain the most recent Accounts Receivable Aged Trial Balance and scan for unusual items. 2. Review calculations of Days Revenue Outstanding (DRO) and ensure all balances are included. 3. Review A/R reconciliation. Trace G/L amount to subsidiary ledger. 4. Obtain the cash receipts and letters of credit control records/logs and review for completeness and accuracy of data entry. 5. Review access control over input of cash receipts and credit memo information. Observe procedures and note any weaknesses. 6. For the test items from revenue sample, verify the funds applications and deposits. 7. Obtain the Credit Department s most recent calculation of the allowance for doubtful accounts. Re-perform the 12
calculations and verify they are in compliance with company policies or that an approved deviation exists. 8. Trace the calculated amount to the G/L. 9. Note that the reserves were properly disclosed in the Risk Review. (Note: Give reference to Risk Review work papers). D. Commission and Bonus Payment Test 1. Verify contacts for salespersons specify commission calculation basis and quotas and are approved. Performed By Work paper Reference 2. Confirm that cash receipts for all commissionable transactions and only commissionable transactions are included in the calculations. 3. Confirm that revenues for all commissionable transactions and only commissionable transactions are included in the calculations. 13
4. Test a sample of commission and bonus payments for mathematical accuracy and management approval 14