Substantive Test

Receivables and Sales

Learning Objectives
• Identify the audit objectives for receivables, sales and related
accounts.
• Describe the primary substantive audit procedures for
receivables, sales and related accounts.
• Identify assertions addressed by audit procedures for
receivables, sales and related accounts.
Introduction
• The audit of receivables and revenue represents significant
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.
Assertions and Audit Objectives
• Existence or Occurrence – All receivables on the statement of
financial position are authentic claims of the entity and all sales have
really occurred and pertain to the entity.

• Completeness – All authentic claims of the entity for amounts

receivable are included on the statement of financial position and all
sales have been included in the statement of comprehensive income.
Assertions and Audit Objectives
• Cut-off – Sales have been recorded in the proper accounting period.

• Valuation and Allocation – Receivables are carried at their net

realizable (collectible) value.

• Accuracy – Sales have been accurately recorded in the statement of

comprehensive income.
Assertions and Audit Objectives
• Rights and Obligations – The entity owns, or has a legal right to all
the receivables on the statement of financial position at the reporting
date.

• Presentation & Disclosure and Classification – Receivables and sales

are properly classified, described, and disclosed in the financial
statements, including notes, in accordance with PFRS.
• Pledged, discounted, or assigned accounts receivable are properly disclosed.
Related party receivables and sales are properly disclosed.
Audit Procedures for Receivables and
Sales
1. Reconciliation of Subsidiary ledger with General Ledger;
2. Confirming receivables and reviewing subsequent cash
receipts;
3. Analyzing notes receivable and related interest;
4. Evaluating the adequacy of the allowance for doubtful
accounts including the appropriateness of the
methodology used to calculate the allowance;
5. Performing accounts receivable and sales cutoff;
Audit Procedures for Receivables and
Sales
6. Checking the appropriate valuation of accounts receivables
denominated in foreign currencies;
7. Investigating any transactions with or related party
receivables;
8. Analyzing credit balances and unusual items;
9. Ascertaining whether any receivables have been pledged or
assigned; and
10. Performing analytical procedures.
Audit considerations when using
confirmation
• The confirmation request should describe that it is not a
request for payment, but merely to confirm the account;
• The confirmation request should be prepared and sent to the
customer under the control of the auditor;
• The auditor may include in the confirmation request the
details of the transactions, such as customer’s purchase
order numbers to improve the response rate;
Audit considerations when using
confirmation
• The confirmation request should be mailed in envelopes
bearing the CPA firm’s return address to ensure that all
confirmation requests that are undeliverable by the post
office are returned directly to the audit firm;
• Receipt or reply of confirmation request should be under the
control of the auditor; and
• Retain copies of all confirmation in the working papers.