In: Accounting
AP9.2 James and Katie will be auditing the revenue account for their retail client, Go Big Tires. They disagree about how to test the occurrence assertion for the revenue account. James thinks they should use Procedure A, while Katie thinks Procedure B is appropriate.
A. Select a sample of sales from the sales journal and agree the details in the journal to the invoices sent to customers, shipping documents, and customer orders.
B. Select a sample of invoices sent to customers, shipping documents, and customer orders and agree to the details recorded in the sales journal.
Required
Who do you agree with, James or Katie, and why? Which assertion does the other procedure provide evidence about?
Solution:
To test the occurrence assertion for the revenue account :
Auditor should consider and assess whether the revenues recorded in
the period were really occurred. There is a risks that revenues
recorded might not occurred.
Hence , Procedure A of James is appropriate and it should be
followed by an Auditor .
That is (i.e),
Select a sample of sales from the sales journal and agree the
details in the journal to the invoices sent to customers, shipping
documents, and customer orders.
From this procedure , an auditor can understand whether that
revenue recorded in the period where really occurred or not.
Whereas, the Procedure B of Katie
(i.e. Select a sample of invoices sent to customers, shipping
documents, and customer orders and agree to the details recorded in
the sales journal.)
is used to test the completeness assertion of the revenue
account.
Completeness Assertion:
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.
Key financial statements assertion related to revenues are:
1.Completeness
2.Cut off
3.Occurrence
4.Right and Obligation