Question

In: Accounting

You are the audit manager. You suspected that the company made some sales on special occasions...

You are the audit manager. You suspected that the company made some sales on special occasions but forgot to record them. The sales were made through normal processes and there was no breach of internal control. You asked your assistant how he would go about to find evidence either to prove or disprove your suspicion. He made four proposals:

(1) Confirming accounts receivable; (2) checking payments received after the balance sheet; (3) calculating gross profit ratio; (4) calculating inventory turnover ratio.

What would you say to him for each of these proposals?

Solutions

Expert Solution

Audit procedure is one of the most importance thing that auditors need to make sure that they are well and correctly prepare and tailor to minimize audit works and risks. Revenues are one of the sensitive areas that auditors need to place their great attention on. This is because it is mater so much on the users of financial statements. Revenues are also the sensitive areas where the risks of manipulation, risks or errors are likely to happen on most of entity.

Financial Assertion Related to Revenues:-

The following are the key financial statements assertion related to revenues:

  • Completeness: This assertion concern the completeness of recording in the financial statements. The incomplete record of revenues might be happen because of many difference reasons including entity’s process and procedure could not capture all the revenues, errors and sometime fraud.
  • Cut off: cut off assertion concerning that revenues are recording in the different period that they are belonging to. This could cause the understated and overstate of revenues that being show in the income statement.
  • Occurrence: Auditor should consider assess the whether the revenues recorded in the period were really occurred. There is a risks that revenues recorded might not occurred.
  • Right and Obligation: Right and obligation is very importance and it is concerning about entity right and obligation over the goods that sold to customers. This is link to the risks and reward then auditors performing cut off testing.

Common Risks Related to Revenues:-

  • Factitious sales amount at end of or during the year that recording in the financial statements to reach to certain amount that could let top management to get certain reward like bonus or incentive.
  • Factitious of sales amount might also committed by sales team or sales manager to get bonus as well inventive like top management.
  • Goods or services that sold are not collectable. These might be the poor customer’s creditability assessment that perform by sales managers or the poor internal control over sales process.
  • Fraud over cash collection from selling of goods or services.

Audit Procedures:-

  • Review the sales occurrence: This is performing by obtaining the sales transactions that recorded in the financial statements during the period as well as sales report that link to the financial statements. Then perform an audit sampling to total population of those sales transactions to review against quotation, sales orders, invoices, contracts and goods delivery noted. Ensure that the sampling items are represent the total population, otherwise the conclusion might go wrong.
  • Perform Sales Revenues Analysis could help auditor to identify the unusual event or transactions related to sales. For example, comparing the sales trend again the goods of goods sold or inventories. This analysis could help auditors to perform additional review if they found that the trend go in different direction. There are many different method to perform an analysis over the revenues that auditors could use such as seasonal sales revenues, trend analysis of revenues compare with related non-financial data.
  • Review the sales price authorization. The fraud over this area is likely to happen. Of cause management is the one who handle to manage and make sure that fraud risk is protected and minimize. But, auditor should also review the control over this area. Focus on unauthorized sales, and unauthorized sales commission that link to performance inventive of sales team and sales manager.
  • Review the collectability: Sales increase is good but collectability of those sales amount is importance. Account receivable analysis should be performed, and credit policy should be review. Review the written off amount of account receivable during the year and then assess its reasonableness.
  • Review the sales recognition whether the recognition of sales during the period are respecting the IAS 18 or not. It is importance to assess that the future economic related to sales will be inflow into the company and the sales amount is measurable.
  • Review the completeness of revenues recording in the financial statements. Revenues might be understated if they are under recording.

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