Revenue & Receipts Cycle
SUBSTANTIVE PROCEDURES
- Trade Receivables
REFERENCES
LEARNING
OUTCOMES
1. Understand the financial statement assertions that are applicable to
the account balances, classes of transactions and events in the
Revenue and Receipts cycle.
2. Apply the direction of testing correctly to a particular assertion.
3. Understand the fraud risks applicable to the revenue and receipts
cycle, including risks of material misstatement.
4. Understand the audit procedures available to the auditor for
substantive testing (“auditor’s toolbox”).
AUDIT
APPROACH
Tests of Controls
Performed to obtain audit
evidence of:
• The suitability of the design
of the accounting and internal
control system
• The effective operation of
the system throughout the
period of reliance.
Conclude on the
Control Objectives
Substantive Procedures
Performed to obtain evidence to
detect material misstatements in the
financial statements
Consist of:
• Tests of detail of transactions,
balances and disclosures;
•Analytical procedures
Conclude on the
Management Assertions
ASSERTIONS
Assertions applicable to R&R cycle
Account balances
 Trade receivables
 Bank & Cash




Existence
Rights
Valuation
Completeness
Transactions and events
 Sales & Returns (Revenue)
 Receipts





Occurrence
Accuracy
Completeness
Cut-off
Classification
Presentation and disclosure: RO4 only
DIRECTION OF
TESTING
AFS
C
O
M
P
L
E
T
E
N
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S
S
Ex
TB
Val
GL
Occ
DL
Acc
SJ
Supp Doc
ACCOUNTING
ASPECTS
AN 10/55
Recognition criteria for revenue – IAS 18
oWhen can a sales transaction be recognised as revenue?
Allowance for doubtful debts
oUncollectable debts: expensed rather than sale adjust
oWhat is a reasonable allowance?
FRAUD RISKS
1. Fraudulent financial reporting (i.e. fraudulently manipulating the
figures in the financial records. Result: Over- or understatement)
Risk
Under/overstated
•Creating fictitious sales
?
•Not recording all sales
?
•Not allowing for all bad debts
?
•Recognize sale before delivery
?
Assertion affected
?
?
?
?
2. Misappropriation of assets (theft, embezzlement, unauthorized use
of assets etc.). Applies to cash and inventory. Examples?
AUDIT
PROCEDURES
Inspection
Observation
Enquiry
Reperformance
Recalculation
Analytical Procedures
Other: External confirmation
[Audit verb]
Inspect
the
[Party/Process/Doc]
[Objective/evidence]
delivery note
for
proof of the
customer’s signature
Revenue & Receipts Cycle
SUBSTANTIVE PROCEDURES
- Trade Receivables
REFERENCES
LEARNING
OUTCOMES
1. Understand and explain the financial statement assertions
that are applicable to trade receivables.
2. Understand the important accounting aspects applicable
to trade receivable.
3. Describe the substantive audit procedures necessary to
audit the assertions relevant to the trade receivables
account balance.
4. Describe the substantive audit procedures to audit a rollforward schedule i.t.o. debtors.
INTRODUCTION
Trade Receivables (“debtors”) = account balance, therefore
assertions applicable:
 Existence: underlying debtors (asset) making up the balance
genuine?
 Valuation: account balance included at appropriate carrying value?
(after proper allowance for doubtful debts)
 Rights: underlying debtors (assets) belong to the entity?
 Completeness: all debtors (assets) that belong to the
entity included in account balance?
INTRODUCTION
Consider the general ledger control account
Dr
Trade Receivables
Cr
Opening balance
R 50 000
Receipts
R 600 000
Sales
R 750 000
Cr Adjustments
R 30 000
Closing balance
R 800 000
Opening balance
R 170 000
R 800 000
R 170 000
Assume allowance for doubtful debts at year-end: R17 000
To which figure to apply account balance assertions?
INTRODUCTION
Consider the debtors list
Trade debtors closing balances at 31 Dec 2012:
ABC Distributors
R 20 000
DEF Retailers
R 40 000
GHI Corporation
R 15 000
JKL Wholesalers
R 35 000
MNO Trading
R 60 000
Grand total (debtors sub-ledger)
R 170 000
Above shows the “assets” underlying the account balance
SUBSTANTIVE PROCEDURES
- EXISTENCE
Risk: Debtor balances in financial records are fictitious as
there are no actual debtors “behind the balance”.
Audit evidence: - Confirm balance directly with debtor
- Verify post year-end receipts
Audit procedures: ?
SUBSTANTIVE PROCEDURES
- EXISTENCE
DEBTORS CONFIRMATIONS
Select sample from financial
records
Choose positive vs. negative
confirmations
Auditor has control of
confirmation process
Mailing of confirmation
letters to debtors
Monitor replies
Follow up disagreements and
no replies
Timing of
confirmations?
Determine possible misstatement of
account balance (under/over)?
EXAMPLE: DEBTORS CONFIRMATION
Audit client name: XYZ (Pty) Ltd
Customer (debtor) name: ABC Distributors
Year end: 31 December 2012
Debtor Silver CC
Reference
Amount per XYZ (Pty) Ltd age
analysis at year end
Invoice IN2678
R
20 000
Customer alleges 5% discount for
early payment of invoice IN2678 not
taken into account by XYZ
(1 250)
Total owing per ABC Distributors
18 750
Audit procedures to audit the difference?
SUBSTANTIVE PROCEDURES
- EXISTENCE
Subsequent receipts testing
 Alternative to debtor confirmations
 Agree year end balances to “subsequent receipts”:
payments received from debtors after year end.
Example:
Silver CC year end balance (31 Dec 2012): R18 750
 relates to 1 invoice only: #IN2678
 paid on 23 January 2013
How does receipt confirm existence of debtor Silver CC?
SUBSTANTIVE PROCEDURES
- RIGHTS
Risk: The audit client does not own the underlying assets
(trade debtors) making up the account balance
disclosed in the AFS.
Audit evidence: no debtors ceded, encumbered, factored.
Audit procedures: ?
SUBSTANTIVE PROCEDURES
- VALUATION
Gross amount
Gross amount =
add Credit sales
less Receipts
+/- Adjustments
•Posted to
Debtors sub-ledger
oCredit balances?
oCast!
Unusual entries?
•Sales journal
•Cash rec. jnl
•Sales returns jnl
TB - AFS
•Posted to
GL control account
Auditor to reconcile GL to sub-ledger/list
- Reconciling items?
oProcedures on foreign debtors (RO)
SUBSTANTIVE PROCEDURES
- VALUATION
Allowance for doubtful debts
Risk: Trade receivables over/understated due to allowance being
under/overstated.
Audit evidence:
- Allowance reasonable
- Consistent with prior year
- In-line with accounting policy/IFRS
- Correctly calculated
- Authorised senior management
- Incl. all potentially irrecoverable debt
- Amount in relation to prior year actual bad
debts
Audit procedures: ?
SUBSTANTIVE PROCEDURES
-COMPLETENESS
•Entails completeness of debtors (assets), not sales per sé
•Unlikely to confirm completeness with confirmations.
•However, completeness testing here relies on completeness
and cut-off of revenue. (Refer to lecture on audit of Sales).
•Why? if all credit sales posted to sub-ledger, then…
•If recorded in incorrect period, then…
Debtor accounts are created (raised) in sub-ledger (“financial records”)
if all sales posted.
SUBSTANTIVE PROCEDURES
-ANALYTICAL PROCEDURES
• Comparisons and ratio calculations to determine risk areas
(“assertions most at risk of misstatement”).
• Usually precedes testing of assertions.
• Unexpected differences (e.g. between current and prior year)
can be followed up/specific procedures performed thereon.
SUBSTANTIVE PROCEDURES
- ROLL FORWARD
 For various reasons (e.g. time constraints at year end), auditor decides/
is compelled to confirm balances before year end.
 Problem then: sufficient appropriate audit evidence not obtained for year end balance.
 Solution: perform “roll-forward” process as per table below.
Roll-forward schedule
Amount
Explanation
Balance 30 Nov 2012
xxxxx Confirmed with debtors
+
Sales
xxxxx
-
Receipts
(xxxxx)
Roll-forward testing (sample selections)
+/- Adjustments
xxxxx
Closing balance 31 Dec 2012
xxxxx Not confirmed with debtors, but indirectly audited
 Primarily to address the existence and valuation assertions.
SUBSTANTIVE PROCEDURES
- ROLL FORWARD
Audit procedures for roll-forward
Prepare or obtain a client prepared roll forward schedule (see preceding slide)
Reperform the mathematical accuracy of the schedule
 Agree, by inspection, the opening balance to the debtors listing for 30 Nov 2012
Agree, by inspection, the closing balance per the roll forward schedule to the
debtors control account in the general ledger and grand total in the sub-ledger.
 Ensure the correct transaction totals have been brought across to schedule by
inspection of the books of prime entry (e.g. sales journal/ cash book).
Note and obtain explanations for any unusual journal adjustments reflected in
the roll forward schedule.
 Inspect supporting documentation for all material transactions.
SUBSTANTIVE PROCEDURES
- ROLL FORWARD
Audit procedures for roll-forward (continued…)
 Ensure system of internal controls remained effective for the month of
December by performing relevant tests of control.
 Inspect the debtors control account for post year-end adjustments and inspect
supporting documentation for any material/large/unusual adjustments that
may relate to the current financial period transactions.
 Perform year end cut-off tests or cross reference to work papers i.r.o sales and
receipts cut-off tests.
 Perform the following analytical procedures:
o Compare the balance at 31 Dec 2012 to the balance at 31 Dec 2011.
o Compare December sales and receipts with prior months.
o Obtain explanations for any unusual differences.
END
Thank you!
Dankie!
Enkosi Kakhulu!!