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REVENUE AND RECEIVABLES

AUDIT PROGRAM

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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.

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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.

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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:

Policy Issue Date

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

________

________ ________ ________ ________ ________ ________ ________ ________ ________

III. UNIFORM CHART OF ACCOUNT COVERAGE:

UCA

A/R Trade - Accruals Installment Receivables A/R Maintenance A/R Annual Maint. H/W

________

________ ________ ________

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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:

A. General Control Review/Segregation of

Duties

Performed By

Work paper Reference

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

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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

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agreement with local management’s

expectations. _________ _________

V. FUNCTIONAL TESTS/VERIFICATION OF CONTROLS:

B. Revenue Tests

Performed By

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,

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• 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

• Cancellations affected backlog, and

• Shipper and/or delivery receipt agrees to

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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

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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

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

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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

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Performed

By

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

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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

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

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4. Test a sample of ____ commission and bonus payments for mathematical accuracy