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Presentation on theme: "Revenue & Receipts Cycle SUBSTANTIVE PROCEDURES"— Presentation transcript:

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!!

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