Audit Documentation of the Revenue Cycle

Cloud 9’s Revenue Process 

The revenue cycle, irrespective of any organization, entails activities and transactions involved in the generation of income through the provision of goods and services to consumers. Therefore, like most organizations, Cloud 9’s revenue cycle has four primary activities- receiving a customer order, the fulfillment of the order through offering goods and services, billing the consumers, and payment collection or process return ( Malau et al., 2020; Weickgenannt et al., 2021 ). Cloud 9’s revenue cycle begins when a customer completes a purchase order on an online site. Customers can visit the online platform, where the price and the quantity of the products available are outlined, and place their order. Upon the placement of the order, the purchase order will go through a credit check before it becomes a sales order. 

Once the purchase order becomes a sales order, Cloud 9 moves to the second activity in its revenue cycle, which is the fulfillment of the sales order. Cloud 9’s system, Swift, assigns shipments to the warehouse location nearest to the customer’s location to fulfill the customer’s sales order. Once the outstanding sales orders are downloaded into scanners, warehouse personnel identify the required items from the inventory available in the warehouse and pack them. To facilitate accuracy, the packing slip and the sales order must match before the approval box is activated. Once the shipping supervisors enter their passcode, the packing slip and billing of lading are approved, ending the fulfillment of the order in Cloud 9’s revenue process. 

A draft invoice is generated once the shipping documents are approved. The quantities of the invoice are compared and matched with those of the packing slip and the sales order. The prices are also matched to those in the sales order. Once the accuracy of the aforementioned parameters is identified, a sales invoice is processed. When processing the sales invoices, the data required for the creation of the sales journal and accounts receivable subsidiary ledger are also entered into the system’s database. 

The final activity in Cloud 9’s revenue process is the collection of payment. To minimize instances of past-due receivables, Cloud 9 screens most credits before the approval of their purchasing order. The sales manager has the responsibility of overseeing the sending of statements to customers with their receivable balances on a monthly basis. Cloud 9 also processes payment through cash receipts. Payments are made through electronic fund transfer (EFT). The AR clerk is responsible for processing cash receipts from online banking. The AR clerk checks for errors made by the bank before they are processed in Cloud 9’s accounting system. Upon the processing of the transaction, the cash receipt data are used to develop the cash receipts journal and account receivables subsidiary ledger. 

The figure below shows Cloud 9’s revenue cycle, including the financial statement accounts and relevant documents developed in the transaction cycle. 

Follow-up Questions for the Client 

The revenue process involves accounts that are prone to fraud. Thus, according to AS 2110 requirements, an auditor should start with the presumption that there is a fraud risk linked to the improper revenue recognition and explore the types of revenue and transactions that may result in those risks (“ AS 2110: Identifying and Assessing Risks of Material Misstatement ”, 2021). Additional standards, such as AS 2110.47 and AS 2310, on analytical procedures and third-party confirmation, respectively, outline the revenue cycle accounts that demand special treatment (“AS 2110”, 2021). Thus, to evaluate the risk, the auditor should ask follow-up questions related to the risk of material misstatement, either accidental or intentional, that may exist in the accounts in the revenue cycle ( Weickgenannt et al., 2021 ). Additionally, the auditor should ask the client about the relevant management assertion for the account balances identified in the risk assessment process. 

Matching Controls to Assertions 

Internal Control in the Revenue Cycle 

Cloud 9 has various internal control to counter the risk of material misstatement. The primary internal control is through its inventory management system, Swift. First, the system ensures that shipment is only approved when the packing slip and the sales order match. Additional control against material misstatement during the fulfillment of the order is through the requirement for the shipping supervisor to enter a passcode before the packing slip and the bill of lading is approved. Furthermore, Cloud 9’s internal control strives to ensure only legitimate revenue transactions are recorded into the respective financial statement accounts. It is only until the accuracy of the sales invoice data is approved that they can be used to develop the sales journal and the accounts receivable data. The same case is witnessed when dealing with cash receipts; the AR clerk must approve the accuracy of the cash receipts from online banking before they can be used in creating the cash receipts journal and the accounts receivable subsidiary journal. Therefore, while the primary internal control is automated in the form of the Swift system, Cloud 9 also has personnel responsible for ensuring that material misstatement is avoided. 

References 

AS 2110: Identifying and Assessing Risks of Material Misstatement. (2021). Retrieved 16 March 2021, from https://pcaobus.org/oversight/standards/auditing-standards/details/AS2110 

Malau, D. E. M., & Malik, M. (2020). Evaluation of Internal Control Design and Implementation of Revenue Cycle: Case Study on Hotel ABC. 

Weickgenannt, A. B., Hermanson, D. R., & Sharma, V. D. (2021). How US audit committees oversee internal control over financial reporting.  International Journal of Auditing ,  25 (1), 233-248.