ACC 421 Module 4 Project One Example

Proving the Revenue: A Risk-Linked Substantive Program for Route Billing and Customer Balances

[Student Name]

Southern New Hampshire University

ACC 421: Auditing and Forensic Accounting

Project One

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Proving the Revenue: A Risk-Linked Substantive Program for Route Billing and Customer Balances

Introduction

Revenue at the linen rental company is $52 million, billed weekly from drivers' handheld delivery records and priced under customer contracts with annual escalation clauses. Receivables at year end are $6.4 million from about 4,200 customers, most of them small. Planning assessed revenue occurrence and cutoff as high risk because of the presumed fraud risk in revenue and the company's loan covenant, and the control test in Module Three raised the risk that cash collected by drivers was not recorded. This project designs the substantive audit program that responds to those risks (Arens et al., 2020).

Risks and Assertions

Table 1. Risks Mapped to Assertions

The Audit Program

Table 2. Substantive Audit Program, Revenue and Receivables

Why These Procedures

The analytical procedure in step 1 is set at route level because revenue fraud or theft would show up as a route whose revenue per stop departs from the pattern, not as a company-wide change. A route with falling cash collections and rising credits is a specific signal to investigate.

Confirmations in step 2 provide external evidence that the balances exist, which is why they are the main response to occurrence risk. Caster et al. (2008) reviewed research and enforcement cases and found that confirmations are most effective for existence when auditors control the process and follow up nonresponses carefully, and least effective for completeness or valuation, because customers rarely report amounts they owe but were not billed. The 30 largest balances cover about 38 percent of receivables by value, roughly $2.4 million; the 30 random selections give every small customer a chance of being selected, which matters because stolen cash payments would leave small unpaid balances on restaurant accounts.

The cutoff test in step 4 responds to the covenant pressure. Under weekly billing, a December 31 billing run could easily include early-January deliveries, and a shift of only $300,000 would exceed materiality. Delivery records from the handhelds, which carry dates and times, provide evidence created at the point of delivery.

Step 6 addresses the driver cash risk directly. If a driver pocketed a payment, the customer's account would show an unpaid balance until someone issued a credit to make it disappear. Credits issued just before or after year end, especially to cash customers, are where that concealment would appear.

Fraud Considerations and Unpredictability

Hogan et al. (2008) note that revenue manipulation remains the most common form of financial statement fraud, and auditing standards call for an element of surprise in the audit's responses to fraud risk. Two elements of the program serve that purpose. Confirmations will include a request to a sample of cash-paying customers asking them to list payments made to drivers in December, which the company does not usually see, and two routes chosen at year end will be ridden by an audit staff member on a January morning to observe deliveries and collections. Neither procedure is large, but both test the controls' weak point in ways that are hard to prepare for. If either turns up a payment the customer remembers but the company never recorded, the program shifts from audit to investigation, and the firm's forensic specialists would be brought in before anyone at the company is told.

Timing and Staffing

Most of the program is performed at or after year end, because the risks concern the year-end balance and the last weeks of billing. Confirmations will be mailed on the second business day of January and tracked by the senior on the engagement, not by client staff, so that the company cannot intercept or alter responses. The cutoff test requires the handheld delivery data for the ten days around year end, which the client's IT manager will export directly to the audit team. The credit review and allowance evaluation will be completed in February, after enough time has passed to see which customers paid and which credits were issued after the audit team arrived. Assigning the cash customer procedures to the most experienced staff member reflects their higher risk.

Evaluating Results

Misstatements found in each procedure will be accumulated, projected from samples to populations where appropriate and compared with performance materiality of $169,000 and overall materiality of $260,000. Any credit or confirmation exception involving a cash customer will be evaluated qualitatively, because a small exception that suggests theft may matter more than a large pricing error.

Conclusion

The program answers each high-risk assertion with at least one procedure that produces external or independently created evidence: confirmations and alternatives for existence, handheld delivery records for cutoff, credit testing and customer inquiries for driver cash, and route-level analytics for occurrence and completeness. It expands testing where the cash control failed and includes unpredictable steps that respond to the fraud risk in revenue. The opinion on this account will therefore rest on evidence the client could not easily shape.

References

Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2020). Auditing and assurance services (17th ed.). Pearson.

Caster, P., Elder, R. J., & Janvrin, D. J. (2008). A summary of research and enforcement release evidence on confirmation use and effectiveness. Auditing: A Journal of Practice & Theory, 27(2), 253-279. https://doi.org/10.2308/aud.2008.27.2.253

Hogan, C. E., Rezaee, Z., Riley, R. A., & Velury, U. K. (2008). Financial statement fraud: Insights from the academic literature. Auditing: A Journal of Practice & Theory, 27(2), 231-252. https://doi.org/10.2308/aud.2008.27.2.231