Audit Procedures and Revenue - Essay Example

 The revenue cycle may vary from one company to another but the cycle generally refers to the daily transactions of the firm. They include order management, sales transaction, and delivery to the customer, invoicing, and posting to the financial statements. It also includes short-term investments and cash equivalents. To know aspects of the revenue cycle of an entity the auditor looks at the general ledger, which is a primary source of financial data, and with the internal controls, these figures should be accurate and true. For mobile streams plc, the revenue cycle may comprise of sales account, trade payables, and receivables account, other incomes account, cash and cash equivalents, and stock ( Georgiades, 2006, 22).

Audit procedures are the tests that the auditor carries out to ascertain that the revenue is stated correctly.  The auditor must understand the industry that the company belongs to and this will enable him to make a comparison to see if the figures are correct. Audit procedures involve designing the tests that will be carried out on the accounts, gathering the evidence, evaluating the results of the tests, and finally making decisions on whether the evidence is sufficient. The procedures can be classified into risk assessment and further audit procedures such as test controls and substantive procedures. The overall objective of the audit will determine the risk assessment, test controls, and substantive procedures to be used (Cangemi, & Singleton, 2003 p. 272)

Risk assessment involves finding out the inherent risks associated with the transactions and this information is obtained from the financial statement and accounts and assumptions level of the company.  One can also source inherent risks from the strength and weaknesses of the Internal control system or from carrying out analytical procedures. An example of inherent risk is the timing of the revenue recognition and it should be guided by professional rules like IASB.

An example of a test control to ascertain the validity of the revenue would be to look at whether there are fictitious sales or not and it would entail looking at the segmentation of the sales process like billing and shipping. Select some transactions and look for approval documents for the said transactions. Test controls should be done for the whole revenue cycle of the company like cash receipts, allowances, and sales returns transactions among others. Test controls are done to ascertain that the due procedures are followed when carrying out transactions; they should be in line with what the company's internal control system has put in place to minimize misstatements of the results (Tricker, 2005,39).

Substantive tests are carried out to determine whether the revenue cycle figures are correct. The objectives of doing substantive tests include finding the completeness, validity or occurrence, valuation, accuracy, and cut-offs for the different accounts that affect the revenue cycle.  Examples of substantive tests for the sales receivables, for completeness, check a sample of sale recorded in the sales journal and trace the transaction back to orders or the shipping documents. This will verify that the transaction has been entered into the books completely in terms of figures.  Cut-off tests determine whether the transactions belong to the said financial year. For example, a sale made at the end of the year should be included in the cost of sales.