Question

How would you audit the automobile revenues (say $100 billion) of General Motors?

Let’s say that each car and truck has an invoice on the window and in GM's computer system, and that 8 million cars and trucks were sold.

Then, how many invoices out of 8 million should you want to examine (audit) in order to verify the $100 billion of revenues in the financial statements? So, you, as the auditor, would feel “comfortable” to sign the auditor’s report (issuing your professional opinion as the auditor) attached to the GM’s annual report to shareholders.

Answer 1

How would you audit the automobile revenues (say $100 billion) of General Motors?

Let’s say that each car and truck has an invoice on the window and in GM's computer system, and that 8 million cars and trucks were sold.

Then, how many invoices out of 8 million should you want to examine (audit) in order to verify the $100 billion of revenues in the financial statements? So, you, as the auditor, would feel “comfortable” to sign the auditor’s report (issuing your professional opinion as the auditor) attached to the GM’s annual report to shareholders.

Audit of Automobile revenues (Say $ 100 Billion)

The revenue is one of crucial element of the Financial Statement which must be audited very carefully because the correct reporting of revenues determine the profitability, financial strength, Accounts Receivable, Tax Calculation, Earning Per Share, Price Earnings ratio etc.

There is lot of possibility that the company shows the revenue in inflated way in order to keep its market capitalization high.

So for the purpose of Audit of revenue, we as an auditor have to follow the given below procedure:

1. 100% audit of sale of 8 million cars which have been sold out can’t be possible, so we need to take the sample of population of 8 million cars.
2. The sample would be dependent upon the past trends of audit of revenues and audit report served by earlier auditors.
3. The sample will be considered keeping in view of volume of sale like corporate sale, individual customer sale etc.
4. The sale of cars in festive season like in Christmas should be carefully reviewed because there is lot of scope of sale of cars without complying the stated procedure like assessment of creditability of the customer.
5. As an auditor of the automobile company, I would like audit at least 10% invoices i.e. 800,000 invoices. The selection of invoice should be mixture of Random Sampling along with the monetary value of the invoices.
6. I need to check the invoices having big value in dollar terms. These invoices should be audited from all prospective like issue of Purchase order, signing of Purchase order which is dependent upon the authorized signatory ( financial authority to sign the PO), delivery of cars or trucks, quality report, Gate pass etc.
7. If the cars are being sold out through credit finance by bankers, then the same should be cross verified from bank credit records.
8. The sample size should be checked completely as end to end transactions.
9. Any revenue transaction which shows overpricing should be checked.
10. The Credit note (CN) against the invoices should be carefully checked and also authenticate the causes of Credit note. What was the reason of issue of CN, is the CN was approved by authorized signatory with RCA (Root cause analysis).