Chapter 9 – Substantive Test of Receivables and Sales: Reflection

Today I learned about substantive test of receivables and sales. And also I
learned the audit objectives for receivables, sales and related accounts, how to describe
the primary substantive audit procedure for receivables, sales and related accounts,
and the last one is how to identify the assertions addressed by the audit procedures for
receivables, sales and related accounts.

It is also worth noting that, under PSA 240, the auditor must evaluate which types
of revenue, revenue transactions, or assertions give rise to such risks based on a
presumption that there are risks of fraud in revenue recognition. If the auditor concludes
that this presumption does not apply, the auditor must document his or her reasoning.
Companies should implement effective high-level controls over the financial reporting of
these accounts, which should include (a) an audit committee to oversee the reliability of
revenue reporting; (b) an internal audit department to monitor compliance with other
revenue cycle controls; (c) human resource policies and practices to ensure that
competent personnel are involved in determining revenue and receivables estimates;
and (d) effective monitoring policies and procedures. In addition, a sound accounting
system and effective control activities for the revenue cycle should be established.

Audit objectives when auditing accounts receivable and sales, the principal
objective for the substantive tests is to determine the following: existing or occurrence,
all receivables on the SFP are authentic claims of the entity and all sales have really
occurred and pertain to the entity. Completeness the audit objectives for this is all
authentic claims of the entity for amounts receivable are included on the SFP and all
sales have been included in the SCI. Cut-off the audit objectives is the sales have been
recorded in the proper accounting period. Valuation and allocation the audit objectives
for this is receivables are carried at their net realizable (collectable) value (i.e., the gross
receivables are properly stated with appropriate allowances provided for doubtful
accounts, discounts, returns, warranties and similar items). Accuracy the audit objective
for this is sales have been accurately recorded in the SCI. Rights and obligations it is
the entity owns, or has a legal right to all the receivables on the SFP at the reporting
date. And the last one is the presentation and disclosure & classification it is receivables
and sales are properly classified, described, and disclosed in the financial statements,
including notes, in accordance with PFRS.

In the audit of accounts receivable, usually test the audit assertions included in
the in the following: The existence assertion determines whether the accounts
receivable on the balance sheet exist. When we audit accounts receivable, the
existence, like other asset items, is usually the most important auditing issue for us.
This is because receivables are likely to be a material area, with inherent risks related to
fraud and sales revenue manipulation. The valuation assertion determines whether the
accounts receivable recorded in the client's accounts accurately reflect their economic
value. Though the receivable confirmation in the above-mentioned audit of accounts
receivable can ensure the existence and accuracy of customers' balances, it cannot
provide evidence on the correctness of accounts receivable valuation. The assertion of
completeness verifies that all accounts receivable have been recorded. In most cases, a
lack of completeness results in an understatement of the accounts and balances; in this
case, because we audit accounts receivable, a lack of completeness results in an
understatement of accounts receivable balances. Right and obligation assertion
determines whether the client has control over all accounts receivable shown on its
financial statements. The audit of accounts receivable is usually concerned with the
factoring of receivables, in which the client should no longer have the right of control
over receivables.

In conclusion, internal audit staff at a company may also conduct substantive

testing. This can provide assurance that internal recordation systems are functioning as
intended. If not, the systems can be improved to eliminate the issues, resulting in a
cleaner audit when the external auditors conduct their tests at the end of the fiscal year.
Internally conducted substantive testing may take place at any time of year. Substantive
testing is an audit procedure that looks for errors in financial statements and supporting
documentation. These tests are required as evidence to support the assertion that an
entity's financial records are complete, valid, and accurate.