SUBSTANTIVE TEST OF RECEIVABLES AND SALES

The audit of receivables and revenue (Sales) represents audit risk because:

a. Many incidences of financial statement fraud have involved the

overstatement of receivables and revenue.
b. Revenue recognition may be based on complex accounting rules; and
c. Receivables and revenue are usually subject to valuation using significant
accounting estimates.

Companies should establish effective high-level controls over the financial reporting
of these accounts, including
a. An audit committee to oversee the reliability of reporting of revenue;
b. An internal audit department to monitor compliance with other revenue
cycles 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 should be established for
the revenue cycle.

Audit Objectives and Procedures:

When auditing accounts receivables and sales, the principal objective for the
substantive tests is to determine the following and its corresponding audit
procedures:

Applicable to Accounts Receivables

Assertion Category Audit Objectives Audit Procedures
(CREV)
Existence All receivables on the SFP  Confirmation of
are authentic claims of receivables to
the entity customers (positive or
negative confirmation)
& review of subsequent
cash receipts.
 Inspect notes on hand
and confirm those not
on hand
 Performing receivable
and sales cut off
 Perform analytical
procedures
Completeness All authentic claims of the  Reconciliation of
entity for accounts subsidiary ledger with
receivable are included in general ledger
the SFP.  Analysis of notes
 receivable and related
interest
 Performing receivable
and sales cut off
 Perform analytical
procedures

Valuation and Allocation Receivables are carried at  Confirmation of

their net realizable receivables to
(collectible) value (i.e. customers
gross receivables are  Analysis of notes
properly stated with receivable and related
appropriate allowances interest
provided for doubtful  Evaluating the
accounts, discounts, adequacy of allowance
returns, warranties and for uncollectible
similar items). accounts
 Testing valuation of
receivables
denominated in foreign
currencies
 Examining sales
returns and allowances
 Perform analytical
procedures
Rights and Obligations The entity owns and or  Confirmation of
has a legal right to all the receivables to
receivables on the SFP at customers & review of
the reporting date. subsequent cash
receipts.
 Inspect notes on hand
and confirm those not
on hand
 Performing receivable
and sales cut off

Presentation and Receivables are properly  Analysis of notes

Disclosure classified, described and receivable and related
disclosed in the FS, interest
including notes in  Investigate receivables
accordance with PFRS. from related parties
 Investigate any credit
Pledged, discounted or balances and unusual
assigned accounts items
receivable are properly  Ascertain the existence
disclosed. Related party of pledged receivables
receivables are properly
disclosed.
 Applicable to Accounts Receivables
Assertion Category Audit Objectives Audit Procedures
(COCAC)
Occurrence All sales have really  Confirmation of
occurred and pertain to receivable to
the entity customers (positive or
negative)
 Analysis of notes
receivable and related
interest
 Performing receivable
and sales cut-off
 Test of details of
recorded sales
 Examining sales
returns and allowances
 Ascertaining
authorization of write-
off
Completeness All sales have been  Analysis of notes
included in the SCI receivable and related
interest
 Performing receivable
and sales cut-off
 Test of details for
completeness of sales
 Perform analytical
procedures
Cut-off Sales have been recorded  Performing receivable
in the proper accounting and sales cut-off
period
Accuracy Sales have been  Confirmation of
accurately recorded in SCI receivable to
customers (positive or
negative)
 Analysis of notes
receivable and related
interest
 Test of details of
recorded sales
Classification Sales are properly  Test of details of
classified, described and recorded sales
disclosed in the FS,
including notes in
accordance with PFRS.