ACCT 432 Week 7 Individual Project 7 Example

Auditing the Revenue and Expenditure Cycles With CAATTs: A Mini-Case on Invoice Gaps, Shipments Never Billed and Payments Without a Match

Case Background

Summit Building Supply, a composite lumber and materials distributor, handles orders, shipping, billing, buying, receiving and paying in a single integrated system. The auditor has read-only extracts for the fiscal year of six tables: sales orders, shipments, invoices, cash receipts, purchase orders and receiving reports, plus the vendor invoice and payment files. Summit had revenue of $186 million and accounts payable of $14 million at year-end, and contractor customers often receive goods on account before an invoice is produced. Hall (2016) explains that in integrated systems the auditor tests the application controls embedded in the processing, as well as the balances that result, and that computer-assisted techniques allow both kinds of tests to cover entire populations.

Revenue Cycle

The two most significant risks are that recorded sales did not occur or fall in the wrong period, and that goods were shipped but never billed. The first overstates revenue; the second understates it and also suggests weak control over inventory leaving the yard. Before running any test, which would otherwise rest on an unverified file, the auditor reconciles the invoice file's total to recorded revenue and the shipment file's quantities to inventory relief, so that the populations are known to be complete. Each test below runs on the full year, not a sample.

Caster et al. (2008) caution that confirmations are stronger evidence for existence than for valuation and can be defeated by false responses, so the confirmation results are paired with a test of cash receipts after year-end for the same customers. The gap and join tests address the controls; the cutoff and confirmation tests address the balances, so together they cover both halves of the audit.

Expenditure Cycle

In the expenditure cycle, the main risks are payments for goods not ordered or received and liabilities left unrecorded at year-end. The auditor would run a three-way match of every payment to a purchase order and a receiving report, listing payments with no purchase order, quantities paid above quantities received and prices above the purchase order by more than 2%. A second test links late-December receiving reports with vendor invoices booked in January, isolating goods that arrived before year-end but may not have been recorded as owed. Huang et al. (2022) describe how audit data analytics make such full-population testing feasible, shifting the auditor's effort from selecting items to investigating exceptions. Both tests depend on the receiving dates being accurate, so the auditor would first observe receiving procedures at the yard and compare a small sample of receiving reports with driver delivery tickets.

Illustrative Results and Evaluation

In this illustration, the gap test finds 14 missing invoice numbers, all traced to voided invoices properly documented in the void log. The shipment-to-invoice join finds 63 shipments with no invoice, totaling $412,000; 58 are year-end shipments billed in the first week of January, which also reveals a cutoff problem, and 5, totaling $38,600, were never billed at all. A shipment with no invoice is lost revenue to the company and a control failure to the auditor. The three-way match flags 22 payments without purchase orders, all for utilities and freight under a documented blanket arrangement, and 3 payments where quantities paid exceeded quantities received, totaling $17,900, which management recovers from the vendors. The cutoff extract confirms the January billing problem and finds no sales recorded in December for goods shipped in January. Confirmations of the 31 largest balances return 27 agreeing responses; the four differences are timing items cleared by January receipts.

Conclusion

The results support reliance on the invoice sequence and three-way match controls, which operated with only explained exceptions. They do not support reliance on billing completeness or on revenue cutoff, so the auditor would propose an adjustment moving the January-billed December shipments into the correct period, recommend an automated report of shipments not invoiced within two days and expand substantive cutoff testing at year-end. Because the tests are scripted, the auditor can rerun them each quarter to see whether the billing control improves.

References

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

Hall, J. A. (2016). Information technology auditing (4th ed.). Cengage Learning.

Huang, F., No, W. G., Vasarhelyi, M. A., & Yan, Z. (2022). Audit data analytics, machine learning, and full population testing. The Journal of Finance and Data Science, 8, 138-144. https://doi.org/10.1016/j.jfds.2022.05.002