Auditing sales and receivables

Question 1

Key issues

Answer 1

• Sales are not overstated or understated
• Receivables actually exist and are collectible
• Allowance made for doubt debt

Question 2

3 elements of revenue cycle

Answer 2

1. Credit sales transactions
2. Cash receipts transactions
3. Sales adjustments

Question 3

2 transaction assertion objectives

Answer 3

1. Cut-off = recorded in right periods

2. Classification = recorded in correct accounts

Question 4

4 balance assertion objectives

Answer 4

1. Existence = AR represent amounts owed by customers
2. Rights and obligations = AR represents legal claims on customers for payments
3. Completeness = AR includes all amounts owed by customers
4. Valuation and allocation = bad debts represents estimate of difference between AR and net realizable value

Question 5

4 presentation and disclosure assertion objectives

Answer 5

1. Occurrence + rights and obligations = disclosed revenue events have occurred and belong to the entity
2. Completeness = all revenue cycle disclosure have been included
3. Classification and understandability = revenue cycle information is appropriately presented and disclosed
4. Accuracy and valuation = revenue cycle information is disclosed accurately and at right amounts

Question 6

Strategy considerations

Answer 6

• Analytical review
• Materiality
• Inherent risk e.g concealing theft, high volume transactions

Question 7

Control risk

Answer 7

Auditor must test design and operating effectiveness of internal controls over sales

1. Filing sales order
2. Shipping of goods
3. Accepting customer orders
4. Approving credit

Question 8

5 substantive tests for sales and AR

Answer 8

1. Initial procedures
2. Analytical procedures
3. Test of details of transactions
4. Test of details of balances
5. Presentation and disclosure