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Substantive Test of Receivables and Sales

The document outlines the audit procedures for receivables and sales, emphasizing the significant risks associated with financial statement fraud and complex revenue recognition rules. It details effective controls, including the role of an audit committee and internal audits, and describes specific audit procedures such as reconciliation, confirmation of receivables, and tests of sales occurrence and accuracy. Additionally, it highlights the importance of addressing discrepancies and management's limitations on audit access.

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Lovenia M. Ferrer
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59 views3 pages

Substantive Test of Receivables and Sales

The document outlines the audit procedures for receivables and sales, emphasizing the significant risks associated with financial statement fraud and complex revenue recognition rules. It details effective controls, including the role of an audit committee and internal audits, and describes specific audit procedures such as reconciliation, confirmation of receivables, and tests of sales occurrence and accuracy. Additionally, it highlights the importance of addressing discrepancies and management's limitations on audit access.

Uploaded by

Lovenia M. Ferrer
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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SUBSTANTIVE TEST OF RECEIVABLES AND SALES

The audit of receivables and revenue represents significant audit risk because:

a. Financial statement fraud involved the overstatement of receivables and revenue


b. Complex accounting rules on revenue recognition
c. Receivables and revenue are usually subject to valuation using significant accounting estimated

If the auditor has concluded that the presumption that there are risks of fraud in revenue recognition is not applicable,
the auditor shall document the reasons for that conclusion.

Effective high-level controls over the financial reporting of these accounts:

a. An audit committee to oversee the reliability of reporting of revenue


b. An internal audit department to monitor compliance with other revenue cycle controls
c. Human resource policies and practices to ensure competent personnel
d. Effective monitoring policies and procedures; a sound accounting system and effective control for revenue cycle

AUDIT PROCEDURES FOR RECEIVABLES AND SALES


1. Reconciliation of Subsidiary First step in the audit of receivable is to obtain an aged trial balance of
Ledger (SL) with General receivable.
Ledger (GL) - Test the clerical accuracy (footing; cross-footing) of the schedule
and briefly inquire of management as to steps taken to ensure the
trial balance is complete (all receivables due to the company are
included on the trial balance)

If the client processes their transaction manually – obtain and review the
reconciliation prepared by the entity between the receivables sub-ledger
and the control account and investigate reconciling items

If the client uses automated processing – request the client to generate the
subsidiary ledger of receivable and then compare it with the balance in the
general ledger
2. Confirmation of Receivables Verification of the existence and gross valuation of receivable is through
and Review of Subsequent confirmation (confirmation should only be performed once the auditor has
Cash Receipt already reconciled the subsidiary ledger with the general ledger)
Confirmation is used unless:
a. Receivables are immaterial
b. Confirming would not provide useful information; and
c. Control risk is so low that other procedures will reduce audit risk to
an acceptable level

Positive Confirmation
- Sent to customer by the auditor requesting a response whether the
stated amount owed is correct or incorrect, or to request the
customer to provide specific information, such as their account
balance with the entity
Specifically used when:
a. Information available to corroborate management’s assertion (s) is
only available outside the entity
b. Entity’s information systems and internal controls are unreliable or
ineffective (assessed level of the risk of material misstatements is
HIGH)
c. Specific fraud risk factors prevent the auditor from relying on
evidence from the entity; and
d. Account balances comprise of SMALL NUMBER OF LARGE
ACCOUNTS
Negative Confirmation
- Sent to customer by the auditor requesting a response only if the
customer disagrees only if the customer disagrees with the amount
stated on the confirmation
Used in the ff. circumstances:
a. Auditor has no reason to believe that recipients of negative
confirmation requests will disregard such confirmation requests
b. Assessed level of the risk of material misstatements is LOW
(obtained sufficient appropriate audit evidence)
c. Very few or no exceptions expected; and
d. Receivables comprise a LARGE NO. OF SMALL, HOMOGENOUS,
ACCOUNT BALANCES, TRANSACTIONS OR CONDITIONS
When customers do not respond to requests, other procedures should be
employed, such as examining subsequent cash receipts, shipping
documents and sales invoices.

Confirmation also can be used to detect lapping and improper sales cutoff
(such as those customers that show smaller balances).

Discrepancies in Customers’ Replies


Majority of such reported discrepancies arise because of normal lags and
in-transit items (e.g., payments made but not received, goods shipped but
not received), dispute sales terms, credits allowed but not reflected in the
records, and clerical errors

Alternative Audit Procedures for Non-responses


 Positive Confirmation Request – generally follow up through email
or a telephone call to illicit replies. If response is still not received,
do the following:
 Examine of subsequent cash receipts in payment of
receivables
 examine of charges and credits to accounts receivables;
and
 examine of related shipping documents, purchase orders
or sales invoices for the sales transactions making up the
receivable
Management’s Refusal to Allow the Auditor to Send a Confirmation
Request
- The auditor is required to inquire as to the reasons for the
limitation. He must seek audit evidence as to the validity and
reasonableness of the reasons because of the risk that
management may be attempting to deny the auditor access to
audit evidence that may reveal fraud or error.
Intercompany Receivable
- Can be verified by sending confirmation to the client’s related
party.
- if the auditor also audits that related party, the auditor may simply
cross-examine the records of the related parties
3. Test of Details for To satisfy these objectives, the auditor performs test of details by selecting
Occurrence, Accuracy, and items from the population of recorded sales during the audit period.
Classification of Sales - It verified if the amounts recognized as revenue really did occur,
are accurate, and are appropriately classified.
Audit procedures to perform this test may include the following:
a. Obtain the related sales information for the period under audit
b. Select items from the sales information, evaluate and obtain
executed sales agreement. Validate the actuality of a contract with
the customer
c. Obtain the invoice issued to the customer to vouch the agreed
transaction price and compare it with the amounts recorded in the
sales information and audit evidence.
d. Request for the evidence of delivery and agree the quantity of
items shipped to the quantity charged to the customer as per
invoice
e. Check if the revenue has been recorded on or after the entity
transferred the control of goods to customers based on the agreed
shipping terms which can be verified in the audit evidence
f. Verify the appropriateness of classification of the transaction and
the related classification depending on the classifications found on
the entity’s financial statement disclosure of sales
g. Evaluate and conclude on the occurrence, accuracy, and
classification of sales under audit
4. Analysis of notes receivable The auditors should trace items to the accounting records and to the noted
and related interest themselves. The auditor should check the accuracy of the interest by
performing independent calculation.

If the interest earned for the year as computed by the auditor does not
agree with interest earned as shown in the accounting records, the auditor
should investigate any difference as there may be unrecorded interest
receipts or notes that was not included in the analysis prepared by the
client.

Noncurrent Notes Receivable


For notes receivable with maturities greater than one year, the auditor
should perform the following procedures:
a. Evaluate if interest and contractual principal payments will be
collected in accordance with their contractual terms; and
b.

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