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Substantive Testing in The Revenue Cycle

The document discusses substantive testing of revenue and accounts receivable. It describes planning considerations for direct tests of transactions and account balances. It then outlines various substantive tests that can be used to test revenue assertions around occurrence, completeness, accuracy, cut-off, and classification. These include vouching sales to customer orders and shipping documents, scanning for duplicate entries, cut-off testing of sales and returns around the balance sheet date, and analytical procedures. It also discusses substantive tests for accounts receivable existence, occurrence, valuation, rights and obligations, and presentation/disclosure, such as obtaining an aging of receivables, confirming with customers, cut-off testing, and reviewing subsequent collections.

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Georgia Florentino
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757 views3 pages

Substantive Testing in The Revenue Cycle

The document discusses substantive testing of revenue and accounts receivable. It describes planning considerations for direct tests of transactions and account balances. It then outlines various substantive tests that can be used to test revenue assertions around occurrence, completeness, accuracy, cut-off, and classification. These include vouching sales to customer orders and shipping documents, scanning for duplicate entries, cut-off testing of sales and returns around the balance sheet date, and analytical procedures. It also discusses substantive tests for accounts receivable existence, occurrence, valuation, rights and obligations, and presentation/disclosure, such as obtaining an aging of receivables, confirming with customers, cut-off testing, and reviewing subsequent collections.

Uploaded by

Georgia Florentino
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Substantive Testing in the Revenue Cycle

Planning for Direct Tests of Transactions and Account Balances

❑ Audit objectives and assertions

❑ Account balance relationships

❑ Risk of material misstatement

❑ Composition of the account

❑ Persuasiveness of audit procedures

❑ Cost of audit procedures

❑ Timing of audit procedures

What are some substantive tests of revenue?

Assertions related to revenue transactions:

❑ Occurrence: Have the transactions occurred and pertain to the entity

❑ Completeness: Have all transactions been recorded

❑ Accuracy: Have transactions been accurately recorded

❑ Cut-off: Have transactions been recorded in the correct accounting period

❑ Classification: Have transactions been recorded in the proper accounts

Substantive Tests of Revenue for Occurrence, Accuracy, and Valuation

Vouch recorded sales transaction back to customer order and shipping document

❑Compare quantities billed and shipped with customer order

❑Special care should be given to sales recorded at the end of the year

❑Scan sales journal for duplicate entries

Substantive Tests of Revenue Cut-off Tests

Can be performed for sales, sales returns, cash receipts

❑Provides evidence whether transactions are recorded in the proper period

❑Cut-off period is usually several days before and after balance sheet date

❑Extent of cut-off tests depend on effectiveness of client controls


Substantive Tests of Revenue Cut-off Tests

❑ Sales Cut-off

 Auditor selects sample of sales recorded during cut-off period and vouches back to
sales invoice and shipping documents to determine whether sales are recorded in
proper period
 Cut-off tests assertions of existence and completeness
 Auditor may also examine terms of sales contracts

❑ Sales return cut-off

 Client should document return of goods using receiving reports


 Reports should date, description, condition, quantity of goods
 Auditor selects sample of receiving reports issued during cut-off period and
determines whether credit was recorded in the correct period

Substantive Tests of Revenue for Completeness

❑Use of pre-numbered documents is important

❑Analytical procedures

❑Cut-off tests

❑Auditor selects sample of shipping documents and traces them into the sales journal to test
completeness of recording of sales

Substantive Tests of Accounts Receivable Existence & Occurrence

Valuation

❑ Are sales and receivables initially recorded at their correct amount?

❑ Will client collect full amount of recorded receivables?

Rights and Obligations

❑ Contingent liabilities associated with factor or sales arrangements

❑ Discounted receivables

Presentation and Disclosure

❑Pledged, discounted, assigned, or related party receivables

Substantive Tests of Accounts Receivable

❑Obtain and evaluate aging of accounts receivable

❑Confirm receivables with customers


❑Perform cut-off tests

❑Review subsequent collections of receivables

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