 In this presentation, we will discuss auditing revenue. We're going to be discussing the revenue cycle and the approach of auditing the revenue cycle. First thing we want to consider is the revenue recognition principle because obviously when we audit the revenue, the timing is going to be one of the major principles that we need to consider with the auditing of revenue. We therefore have to understand the accrual principle as it relates to revenue. That's the revenue recognition principle. Now, this is going to be a fairly detailed revenue recognition principle because we want to see this step-by-step as we can apply it to the approach for auditing revenue. So revenue recognition principle, just in general terms, we might just say that we're going to recognize revenue when it has been earned, but we want as opposed to when cash is received. That's probably what most people would say as a revenue recognition principle. But we want to be very specific in this and we want to be able to apply this to different types of businesses as well because we may have some businesses that sell goods inventory. We may have other businesses that have services. So revenue recognition principle, revenue can be defined as inflows or other increases of assets of an entity. So we're going to say there's some kind of inflow. Does it have to be cash? Did we define cash here? No, because another inflow could be accounts receivable, for example, going up as we make a sale on account of the entity or settlement of liabilities. This is often something that is overlooked. It's quite possible that we make a sale and instead of receiving something instead of getting some type of asset accounts receivable or cash, we have something that is a liability that's relieved in some case, reducing a liability. Now that's not normal process that happens. Usually accounts receivable goes up or cash goes up, but it's quite possible that we could have a liability go down and that would still be revenue should be in the definition of an entity from providing goods. So goods or inventory providing services. So we're having services which would be non inventory related for a service type company or from activities that make up the entity's major operations. So when we are considering revenue, we're typically considering those major operations. So for example, if we're in the business of selling some type of inventory, and we actually happen to sell some stocks and bonds, some of our investments, we're not a financial company, but we sold stocks and bonds, or we earned interest on stocks and the bonds, and we had capital gains of some kind or interest income or dividend income. This would be another type of income, but it's not going to be our principal revenue recognition in the operations of the business. So let's go through this one more time. Revenue can be defined as inflows or other increases in assets of an entity or settlement of liabilities of an entity from providing goods, providing services or from activities that make up the entity's major operations. So what are we going to do in the auditing of the revenue approach within the auditing process? We're going to have to understand the business. What is it that they do in order to generate revenue? We're going to identify the contract with the customers. So what's going to be the contract that is involved with the customer with regard to revenue recognition? What kind of contract is it? Is it goods or services that are being given? Is it goods that are being given or services that are being given or some combination of the two? Identify the performance obligations in the contract. So what is the performance that has to be done? We need to know that because that's a major component to the revenue recognition principle because that's typically the point in time when the revenue should actually be recognized within the agreement. Determine the transaction price. So what's going to be the transaction price for the contract that's being involved for the major operation of the business, allocate the transaction price to the performance obligations in the contract. So we're going to allocate that out and then recognize revenue when the entity satisfies performance obligation, which of course is in alignment with our revenue recognition principle. Revenue recognition fraud risks. So as we go through this, we want to be considering the fraud risks. One type of fraud risk is side agreements. Side agreements are arrangements that are used to alter the terms and conditions of recorded sales. So we're going to be altering the terms and that's typically not a good thing to do because it could be deceptive. That's where the fraud comes into place. So one more time, arrangements that are used to alter the terms and conditions of recorded sales in order to entice customers to accept delivery of goods and services. Then we have channel stuffing, which is a marketing practice that suppliers sometimes use to increase sales by incentivizing distributors to buy a substantially more inventory than they can promptly sell. And of course we can imagine this happening at the end of the year. If you were, if you could, you could imagine a manager at the end of the year saying, I need to increase sales to this level because I want to get my bonus and I have to get over this level before the end of the year, the cutoff is at 1231. How can sales be increased? Well, maybe we can somehow incentivize our distributors to purchase more before the end of the year in some way and they're going to purchase more than they otherwise would, thereby increasing the sales before the cutoff. Now in the long term, of course, it's not going to be a good thing because the increase in the sales of the cutoff would be just a timing difference. That would indicate that you would think that sales would decrease after the year and it kind of distorts basically the numbers and it could actually decrease the amount that is going to be sold because you might have to have some type of incentivization in order to incentivize someone to have the higher purchases maybe by discounting and or hurt the relationship with the distributors in that way by kind of changing the normal terms. Related party transactions, related party transactions, transactions that are not considered at arm's length. So for example, if a company had something like a subsidiary and there was some type of related party transactions, the subsidiary being in some way owned or related to the parent company, you can imagine sales types transactions that would happen to the related party. That could be another way that a manager or company might try to manipulate or increase their sales by basically making sales to related party at terms that aren't arm's lengths, meaning they're not like normal market sales because they're at related party level. And then we have