1. Revenue & Receipts Cycle SUBSTANTIVE PROCEDURES
- Trade Receivables

2. References

3. Learning
Outcomes
Understand the financial statement assertions that are applicable to the account balances, classes of transactions and events in the Revenue and Receipts cycle.
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”).

4. AUDIT APPROACH Tests of Controls Substantive Procedures
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.
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 Control Objectives
Conclude on the Management Assertions

5. Transactions and events
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

6. Direction of Testing AFS C OMP Ex Val TB L E Occ T ENE Acc GL S DL SJ
Supp Doc

7. Accounting Aspects Recognition criteria for revenue – IAS 18
AN 10/55
Recognition criteria for revenue – IAS 18
When can a sales transaction be recognised as revenue?
Allowance for doubtful debts
Uncollectable debts: expensed rather than sale adjust
What is a reasonable allowance?

8. Fraud risks
1. Fraudulent financial reporting (i.e. fraudulently manipulating the figures in the financial records. Result: Over- or understatement)
Risk Under/overstated Assertion affected
Creating fictitious sales ? ?
Not recording all sales ? ?
Not allowing for all bad debts ? ?
Recognize sale before delivery ? ?
2. Misappropriation of assets (theft, embezzlement, unauthorized use of assets etc.). Applies to cash and inventory. Examples?

9. [Objective/evidence]
Audit
Procedures
Inspection
Observation
Enquiry
Reperformance
Recalculation
Analytical Procedures
Other: External confirmation
[Audit verb]
[Party/Process/Doc]
[Objective/evidence]
Inspect the delivery note for proof of the
customer’s signature

10. Revenue & Receipts Cycle SUBSTANTIVE PROCEDURES
- Trade Receivables

11. References

12. Learning
Outcomes
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 roll-forward schedule i.t.o. debtors.

13. 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?

14. Dr Trade Receivables Cr
Introduction
Consider the general ledger control account
Dr Trade Receivables Cr
Opening balance R
Receipts R
Sales R
Cr Adjustments R
Closing balance R R R R
Assume allowance for doubtful debts at year-end: R17 000
To which figure to apply account balance assertions?

15. Introduction Trade debtors closing balances at 31 Dec 2012:
Consider the debtors list
Trade debtors closing balances at 31 Dec 2012:
ABC Distributors R
DEF Retailers R
GHI Corporation R
JKL Wholesalers R
MNO Trading R
Grand total (debtors sub-ledger) R
Above shows the “assets” underlying the account balance

16. 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: ?

17. Determine possible misstatement of account balance (under/over)?
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)?

18. Example: Debtors Confirmation
Audit client name: XYZ (Pty) Ltd
Customer (debtor) name: ABC Distributors
Year end: 31 December 2012
Debtor Silver CC
Reference R
Amount per XYZ (Pty) Ltd age analysis at year end
Invoice IN2678
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?

19. - Existence Subsequent receipts testing Substantive Procedures
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?
sample of debtors on the year end debtors list is selected
Payments received after year-end are identified (CRJ)
Receipts are then traced (agreed by inspection) to debtor’s remittances to identify which invoices the payment is in respect of
These invoices and matching delivery notes are then inspected to confirm that
dated prior to the year-end
included at year-end in the sales journal and debtors ledger

20. 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: ?

21. - Valuation Substantive Procedures Gross amount Gross amount =
Unusual entries?
TB - AFS
Gross amount =
add Credit sales
less Receipts
+/- Adjustments
Sales journal
Posted to
GL control account
Cash rec. jnl
Sales returns jnl
Posted to
Debtors sub-ledger
Auditor to reconcile GL to sub-ledger/list
Reconciling items?
Credit balances?
Cast!
Procedures on foreign debtors (RO)

22. - Valuation Substantive Procedures 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: ?

23. -Completeness Substantive Procedures
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.

24. -Analytical Procedures
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.

25. - Roll Forward Substantive Procedures Roll-forward schedule Amount
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
Receipts
(xxxxx)
Roll-forward testing (sample selections)
+/- Adjustments
Closing balance 31 Dec 2012
Not confirmed with debtors, but indirectly audited
Primarily to address the existence and valuation assertions.

26. - Roll Forward Audit procedures for roll-forward
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.

27. - Roll Forward Substantive Procedures
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: 
Compare the balance at 31 Dec 2012 to the balance at 31 Dec 2011.
Compare December sales and receipts with prior months.
Obtain explanations for any unusual differences.

28. END
Thank you! Dankie!
Enkosi Kakhulu!!