UNIVERSITY OF JOHANNESBURG
DEPARTMENT OF ACCOUNTANCY
AUDITING 300/BCTA
2018
MODULE: Revenue & Receipt Cycle
,REVENUE AND RECEIPT CYCLE
1.1 INTRODUCTION OF THE TOPIC
It is important for the auditor to obtain an understanding of the client’s revenue and
receipt cycle. This will enable the auditor to assess the materiality and reasonableness
of significant balances and classes of transactions arising from the cycle and also to
identify risks of material misstatement that should be addressed.
1.2 CHARACTERISTICS AND ACTIVITIES IN THE CYCLE
The revenue transactions of an entity comprise the means by which it earns income
from its ordinary business activities:
Sale of goods
Rendering of services
Use of the entity assets by others yielding interest, royalties or dividends.
Accounts affected in this cycle:
Statement of Comprehensive Income:
Sales
Sales returns
Settlement discount
Bad debt written off
Cost of sales
Statement of Financial Position:
Accounts receivable
Bank
Provision for bad debt
Inventory
VAT
1) CREDIT SALES
3 MAIN FUNCTIONS IN CYCLE: 2) CASH SALES & RECEIPTS
3) SALES ADJUSTMESTS
, 1.3 CREDIT SALES
Documentation used:
Customer order
Internal sales order
Picking Slip
Delivery note
Sales invoice
Sales journal
Debtors Ledger and General Ledger
Monthly Debtors statement
NB: It is important to know the flow of documentation when test of controls or
substantive procedures are to be performed in the cycle.
Functional areas within credit sales:
a) Credit control function
b) Ordering function
c) Dispatch function
d) Invoicing function
e) Revenue recording function
A) Credit Control Function:
New Customers
Credit application form to be completed for each customer
Background checks to be performed on customer to ensure their
creditworthiness
Credit department to establish credit limits for each customer
Capture customer’s information on permanent master files
Changes to customer’s information must be authorised by the credit manager
Existing Customer
Identify if customer is a valid/authorised customer through confirming the
customer detail or account number.
Before order is accepted ensure that the transaction is within the credit limit
If function is effective - reduce risk of provision for bad debt.
DEPARTMENT OF ACCOUNTANCY
AUDITING 300/BCTA
2018
MODULE: Revenue & Receipt Cycle
,REVENUE AND RECEIPT CYCLE
1.1 INTRODUCTION OF THE TOPIC
It is important for the auditor to obtain an understanding of the client’s revenue and
receipt cycle. This will enable the auditor to assess the materiality and reasonableness
of significant balances and classes of transactions arising from the cycle and also to
identify risks of material misstatement that should be addressed.
1.2 CHARACTERISTICS AND ACTIVITIES IN THE CYCLE
The revenue transactions of an entity comprise the means by which it earns income
from its ordinary business activities:
Sale of goods
Rendering of services
Use of the entity assets by others yielding interest, royalties or dividends.
Accounts affected in this cycle:
Statement of Comprehensive Income:
Sales
Sales returns
Settlement discount
Bad debt written off
Cost of sales
Statement of Financial Position:
Accounts receivable
Bank
Provision for bad debt
Inventory
VAT
1) CREDIT SALES
3 MAIN FUNCTIONS IN CYCLE: 2) CASH SALES & RECEIPTS
3) SALES ADJUSTMESTS
, 1.3 CREDIT SALES
Documentation used:
Customer order
Internal sales order
Picking Slip
Delivery note
Sales invoice
Sales journal
Debtors Ledger and General Ledger
Monthly Debtors statement
NB: It is important to know the flow of documentation when test of controls or
substantive procedures are to be performed in the cycle.
Functional areas within credit sales:
a) Credit control function
b) Ordering function
c) Dispatch function
d) Invoicing function
e) Revenue recording function
A) Credit Control Function:
New Customers
Credit application form to be completed for each customer
Background checks to be performed on customer to ensure their
creditworthiness
Credit department to establish credit limits for each customer
Capture customer’s information on permanent master files
Changes to customer’s information must be authorised by the credit manager
Existing Customer
Identify if customer is a valid/authorised customer through confirming the
customer detail or account number.
Before order is accepted ensure that the transaction is within the credit limit
If function is effective - reduce risk of provision for bad debt.
