AUDITING

PROCEDURES
ON REVENUE
 AUDIT OBJECTIVES

Audit objectives for revenue and a) The sales are neither understated nor
receivables are concerned with overstated, and the sales are genuine;
obtaining sufficient audit evidence
for the transactions and balances.
b) The receivables are in existence and
The key issues in auditing sales
the amounts are collectible
and receivables are to ensure that:

c) Provisions for doubtful debts are

adequately provided for receivables that
have became a bad debt or are doubtful in
terms of their collectability
 NATURE OF REVENUE

“
Auditors should understand the process of revenue
recognition when they audit the revenue and receivables.
The revenue recognition process included in the revenue
cycle. The information flows in the cycle through numerous
accounts such as:

(a) Sales:
(b) Cash receipts;
(c) Accounts receivable; and
(d) Sales returns and allowances.
Revenue cycle process includes receiving orders from
customers and involves documentation such as

- customer orders,
- sales orders and
- shipping documents.
- invoice for billing of sales.

Journals, accounts and statements are involved in the

recording process

Receipts are documents used in sales and account

receivable collections

Controls should be put in place by the companies to

mitigate any frauds or misstatements in the financial
statements

Auditors should assess whether such controls are working

effectively to mitigate misstatements in a financial
statement assertion.
 AUDIT ASSERTION & ACCOUNTING TREATMENTS

The auditor should (a) Pressure to report high

consider factors that profit-the entity tends to engage
may affect the assertions in fraudulent reporting by
about classes of creating fictitious sales or
transactions and account incorrectly recognize sales; and
balances, such as:

(b) Pressure to report a The design of an In the event that a fraud risk is
higher level of working audit plan should identified, the auditor should make
capital-the entity may reflect its response sure that controls over sales and
understate allowance for to a fraud risk such receivables are established and
doubtful accounts or as performing further implemented adequately and
overstate account audit procedures effectively.
receivables.
 ACCOUNTING SYSTEM & CONTROL ACTIVITIES

Implementing adequate control Before control activities are further discussed,

activities is crucial for sales and it is important to understand the three main
receivable account because they components of the revenue cycle, which are
affect the business as a whole. sales, cash receipts and sales adjustments

The sales process The sales department will check the order
starts with a customer and customer credit rating before
placing orders for with approving the amount of sales and credits
the sales department
 MATERIALITY & RISK OCCURRED

The control assessments The auditor should design an
are performed in the test appropriate audit approach
of controls after based on the assessment of
considering results from the identified risks at both the
risk assessments. financial statement level and
the assertion level
The assessed risks are
different between the material
losses of transactions, account
balances and disclosures
 MATERIALITY & RISK OCCURRED
Therefore, the most For example, tests for
appropriate and effective controls are more appropriate
audit approach varies to test for the completeness
of sales and substantive tests
are applicable for the other
assertions
Furthermore, tests for controls
focus on the operation of
controls over sales transactions
and cording process in the
revenue cycle rather than on the
accuracy of sales d receivables
amount
 MATERIALITY & RISK OCCURRED

An understanding of the entity and Regarding the sales and receivables, the
planning. It helps to determine the auditor should understand the nature of the
potential misstatements on the financial entity's businesses in terms of margins can
be determined by:

(a) The types of (b) Pricing, sales returns, discounts, credit (c) The target markets
products or services- sales and payment policies average and customers-the level
gross collection periods, and potential fictitious of receivables can be
adjustments or transactions can be understanding the
determined products; estimated by
understanding the
customer classes and the
industry
MATERIALITY & RISK OCCURRED

Furthermore, understanding the entity's

business environment helps to assess
inherent risks relating to assertions for
receivables and sales.

A number of potential inherent risks are

derived from business risks, such as:
(a) A decrease in sales due to economic declines

(b) Doubtful debts due to the inability to collect

receivables

(c) Overstatements or understatements of sales

due to improper sales recognition.
 MATERIALITY & RISK OCCURRED

Based on the information obtained from understanding an entity,

inherent risks and internal controls, the auditor assesses risks of
material misstatement (inherent and control risks)

For example, the auditor may determine whether the sales are
susceptible to risk of overstatement due to pressure to report
high profits

In addition, the auditor should assess if controls over

sales cut off are effective to ensure sales are recorded in
the proper period

Once risks of material misstatement are determined, the

auditor should design further audit procedures.
 AUDIT EVIDENCE

A delivery note with the description of goods and

quantity will be issued together with goods sent
to the customer

The date of delivery will be taken as a point

where sales can be recognized, on the shipping
term such as freight on board (FOB) destination
and shipping point.

Then, a sales invoice is issued based

on the information depending stated in
the delivery note and the price list

If the company gives any discount to the

customer, it will be clearly stated in the
invoice together with the credit terms (if any)
 AUDIT EVIDENCE

The sales invoice is then sent to the customer and a

copy will be sent to the accounts department for
recording purpose

The collection department is responsible for

collecting payments from the customer

While the keying in of data is delegated to each

department, the accounts department is responsible
for ensuring that all transactions such as sales, return
and allowances and cash collections are properly
recorded
 FUTHER AUDIT PROCEDURES

This section discusses tests of controls and substantive

procedures for sales and receivables

The tests of controls should be performed prior to the

substantive tests

However, in the event that the controls over sales and receivables are not well
implemented or ineffective, the substantive procedures should be done after the
auditor obtains an understanding of internal controls

Certain tests of controls are performed during an understanding of internal controls


Tests of controls are designed
to obtain sufficient evidence to
determine whether controls
over sales and receivables are
functioning effectively
TEST OF CONTROLS
For example, vouching and tracing The tests of control involve
procedures are performed to testing of design effectiveness
evaluate the controls over sales and and operating effectiveness
receivables effectively ensure the
occurrence and completeness of
sales and receivables transactions.
 TEST OF DESIGN EFFECTIVENESS

Auditors use the understanding
of the information system and
internal control system specific
to the client to determine the
presence of essential controls
over sales and
Auditors need to understand
the function within the
revenue cycle to determine
the necessary controls and
potential misstatements
Once the auditor identifies the
presence and absence of the
necessary controls, the auditor
makes a preliminary assessment
of control risk
 TEST OF OPERATING EFFECTIVENESS

Next, the auditor should For example, the auditor The auditor may obtain
perform a test of operating may perform observation, substantive evidence
effectiveness of controls, reperformance, and simultaneously when they
which involves a variety of document inspection perform procedures to
procedures (vouching and tracing) test the operating
effectiveness of controls,
which are known as dual
purpose tests
 TEST OF OPERATING EFFECTIVENESS

However, the auditor The size of misstatements For example in the event that
should draw conclusions is determined by the misstatements are detected in
cautiously because the test substantive test, of which sales transactions, the auditor
of controls only determines the misstatements are may conclude that the controls
the number of considered to be over sales are not operating
misstatements and not the significant when they are effectively
size of misstatements. material
 SUBSTANTIVE PROCEDURES

The audit program or substantive The timing or extent of the procedures

procedures prepared based on a is based on the results from the test of
preliminary assessment of control risks controls and the level of detection risk

However, the auditor may use
the professional judgement to
determine how detailed
substantive procedures are
and normally, the auditor
performs more than the
minimum level of testing
When inherent risks for sales and
receivable transactions are high and their
control risks are low, it is appropriate for
the auditor to set a moderate level of
detection risks to achieve the required
audit risk
The level of detection risks
influences the amount of
procedures undertaken by
the auditor to ensure the
existence and occurrence of
sales transactions
DESIGNING SUBSTANTIVES PROCEDURE
The substantive procedures should be carefully planned in
terms of their nature to ensure that the type of procedures is
effective to obtain appropriate audit evidence to determine the
existence of sales and receivables transactions

When the planned level of detection risk is low, the most

effective substantive procedures should be performed.
Effective substantive procedures help to reduce the
detection risk when the possibility of material misstatements
remaining undetected in individual assertions is low

This section discusses the substantive procedures for receivables and

the related allowances. The types of substantive procedures are:
a) Analytical procedures
b) Test of details of transaction
c) Test of details of balance
TYPES SUBSTANTIVES PROCEDURE

a) Recalculation-auditors should add up the listing and

compare the total with the amount in the ledger

b) Compare a sample of customer details and balances

between the listing and the subsidiary ledger
Thank You