Summary

Summary Revenue and Receipts cycle substantive procedures

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Course
The Audit Process (AUE3761)

Institution
University Of South Africa (Unisa)

The document contains information on how to formulate substantive procedures for the revenue and receipts process(including trade receivables)

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Uploaded on July 30, 2024
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Written in 2023/2024
Type Summary

revenue and receipts substantive procedures

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Auditing substantive procedures

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1. Other - Substantive procedures for inventory and production cycle
2. Summary - Revenue and receipts cycle substantive procedures
3. Summary - Payroll and personeel substantive procedures
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Substantive procedures of transactions in revenue and
receipts cycle
Occurrence – Recorded transactions have occurred, and they
pertain to the company
✓ To obtain evidence that recorded sales occurred, we need to trace a sample of the
recorded sales back to source and inspect the supporting documentations for the
invoice, to confirm that:
- And order was received from an approved customer
- A picking slip and despatch note for goods invoiced, signed by picker and
despatcher exist, and
- The goods invoiced to the customer were of a type sold by the company
- We should also trace each sale in the sample through to the cash receipt
journal/bank statement and customer remittance advice and by inspection,
determine whether a payment of the correct amount of each invoice was
received.
- The results of tests of controls will have a significant effect on the extent of these
tests.
- In certain instances, the auditor may need to give specific consideration to
whether the performance obligations per the contract have been met, for
example:
• where the goods are supplied to the customer on approval. A sale should
not be recognised until the buyer has “approved the goods” or the
specified date has been reached
• where goods have been placed with an agent on consignment, a sale
should not be recognised until the agent has sold the goods, and
• where a buyer purchases goods but requests that the supplier delays
delivery, the sale can only be recognised when the contractual
performance obligation has been met. Therefore, whether delivery was
an aspect of the contractual obligation will need to be considered
- Regarding cash sales, there is usually very little risk that cash sales that have
been recorded have not occurred. However, to test occurrence, the auditor may
choose to select a small sample of recorded cash sales and trace them to the
relevant deposit slip/cash book/bank statement and to the original cash sale
invoice/receipt, till roll or daily cash sales spreadsheet.

Accuracy – The amounts of sales have been recorded appropriately
✓ The auditor must conduct tests to ensure transactions are processed and transferred
correctly. One method involves using a test pack of sales transactions to compare
actual results with expected outcomes predetermined by the auditor. An easier way
would be for the auditor to select a random sample of invoices and for each invoice:
- confirm the mathematical accuracy of the invoice by recalculating all extensions,
casts, discounts and VAT calculations
- confirm prices and discounts charged and granted to official price lists or other
sources
- confirm that the invoice is a valid tax invoice (e.g. VAT registration number is
included), and

, - agree the quantity and description of the goods invoiced to the quantity and
description of the goods on the despatch note

Cut-off – The sales transactions have been accounted for in the
correct accounting period
✓ Cut-off can be tested in various ways but will hinge on obtaining evidence about the
dates when the risks and rewards of ownership actually transferred. The auditor
should:
- at year-end obtain the document numbers of the last documents used in the
financial year, for example, sales invoices, and despatch notes
- at a later stage he should agree this number to the last entry in the sales journal
and sequence test, say, the last two weeks of invoices before year-end, for any
missing invoice numbers (these may represent sales that have been made but
not entered prior to year-end)
- scrutinise the subsequent month’s sales journal for any invoice numbers lower
than the cut-off number (none should be found)
- select, say, the first 20 invoices (or invoices for material amounts) entered in the
sales journal for the month after year-end and trace them to the supporting
despatch notes/delivery records and by inspecting dates on the documents,
confirm that the goods were not actually delivered prior to the year-end, and
- select, say, the last 20 despatch notes prior to the year-end cut-off despatch note
number and by inspection of the sales journal, confirm that the corresponding
sale was raised prior to year-end.
- inspect the cash sales records (e.g. till slips, cash receipts) for, say, the two or
three days either side of the financial year-end and confirm by inspection of the
cash sales ledger account and dates on deposit slips, that the sale and the asset
were raised in the correct accounting period.

Classification – All sales have been recorded in the proper
accounts
✓ The auditor may also choose to:
- test transfers of amounts from the monthly sales journals (both cash and credit
sales) to the sales and VAT accounts in the general ledger to confirm that the
amounts were posted to the correct account, and
- inspect the sales account for the inclusion of any amounts that are recorded as
revenue, but do not constitute sales, for example, interest, income, dividend
income.

Completeness – All sales that should have been recorded, have
been recorded
✓ The substantive procedures that the auditor will conduct for completeness testing will
be analytical.
For example:
- analysis of gross profit fluctuations

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