Audit-is-cool continues to supply auditors with information
on different topics of audit methodology. This week we provide most popular
procedures to provide assurance on financial statement line "Revenue".
TEST OF CONTROLS
- Make a selection of sales transactions from independent source records e.g. shipping records, delivery orders, purchase orders etc.
- Test the completeness of source records by ensuring their numerical sequences.
- Check that sales data is input only once and is subject to validation.
- Access to sales system is restricted by user ID and password.
- Check that prices are charged in accordance with the approved price list.
- Check that the quantity discounts are in accordance with the approved limits.
ANALYTICAL
PROCEDURES
- Have the client prepare a comparative monthly analysis of sales by product line, division or other business segment, including gross sales, returns and allowances and discounts. Verify the clerical accuracy of the analysis.
- Perform analytical procedures on sales by developing an expected amount of sales based on prior year’s figures or current period economic conditions and then comparing it with actual amount. Any significant differences should be enquired into and corroborated.
TEST OF DETAILS
- Have the client reconcile totals for gross sales and sales deductions to the general ledger control accounts.
- Verify the sales invoices and check that the customer name, product description and quantities and price are mentioned on the invoice and compare it with the description of sales order.
- Review applicable sales invoices and shipping documents to determine the accuracy and validity of each selected sales transaction and sales tax charged thereof, if applicable.
- Document the criteria for selection of sales invoices for verification purposes and ensure that sample is representative both for volume and amount of transaction.
- Scan the sales journal to check whether there is any duplication of sales invoice numbers or gap in the sequence of invoice numbers to identify invoices cancelled, if any.
- Review significant sales returns and credit memos issued during the period as well as subsequent to the balance sheet date to determine whether they were properly authorized and recorded in the proper period.
- Discuss with appropriate client’s personnel the existence of significant uncertainties at the time
- of sales, if any, like recoverability, warranty and other obligations, price protection agreement or revenue limitation.
- Make a selection of transactions from recorded sales and shipping records for prior and after period-end and ensure proper cut-off.
- Ensure that all sales in foreign currencies are translated using exchange rate prevailing at the date of sale (a rate that approximates the actual rate for example, weekly / monthly average is also acceptable).
- Consider reasonableness of revenue by multiplying the number of units with the average selling price.
- Determine that the accounting policies and methods of revenue recognition are appropriate and are applied consistently.
