Revenue & Receipts Cycle SUBSTANTIVE PROCEDURES - Transactions & Events

R EFERENCES

L EARNING O UTCOMES 1.Understand the financial statement assertions that are applicable to transactions and events in the cycle. 2. Understand the important accounting aspects applicable to transactions and events in the cycle. 3. Describe the substantive audit procedures necessary to audit the transactions and events in the cycle.

Occurrence Accuracy Completeness Cut-off Classification Sales transactions (movements in trade receivables) Receipt transactions (movements in cash & bank balances) ASSERTIONS Occurrence Accuracy Completeness Cut-off Classification

RISKS Sales / Receipt transactions: Risk Assertion affected  Never approved?  Recorded but not real?  Real but not recorded?  Incorrect amount?  Incorrect period?  Incorrect account?

Occur? Accurate? Sample Complete? Can’t sample from here!

Sample Cast? Accuracy Cut Off

Type of goods Occurrence Cast? Accuracy Prices to price lists Accuracy Quantity to ? Accuracy Date? Cut -0ff What sold? Goods? Classification

Quantity Accuracy Delivered? Risks & rewards of ownership? Occurrence/ Cut Off Completeness ?

Matches or agrees to approved customer order? Occurrence

S UBSTANTIVE P ROCEDURES - O CCURRENCE Risk: Sales overstated -> exaggerated financial performance Audit evidence: Proof that transaction actually took place - Supporting documents (ISO, DN, INV) - Approval for transaction - Customer acknowledgement - Subsequent receipt Direction of testing: ? Population for sample: ? Audit procedures: ? Risk: Sales overstated -> exaggerated financial performance Audit evidence: Proof that transaction actually took place - Supporting documents (ISO, DN, INV) - Approval for transaction - Customer acknowledgement - Subsequent receipt Direction of testing: ? Population for sample: ? Audit procedures: ? (Credit sales)

S UBSTANTIVE P ROCEDURES - A CCURACY Risk: Sales over- or understated Audit evidence: Proof that transaction recorded at correct quantity and correct price - Amount in financial records = supp.doc. - Casts & Calculations - Tax calculations Direction of testing: ? Population for sample: ? Audit procedures: ? Risk: Sales over- or understated Audit evidence: Proof that transaction recorded at correct quantity and correct price - Amount in financial records = supp.doc. - Casts & Calculations - Tax calculations Direction of testing: ? Population for sample: ? Audit procedures: ?

S UBSTANTIVE P ROCEDURES - C UT - OFF Risk: Sales over- or understated Audit evidence: Proof that transaction recorded in financial period to which it pertains - Date of delivery goods/render service as per relevant supporting document (which?) Audit procedures (example): Risk: Sales over- or understated Audit evidence: Proof that transaction recorded in financial period to which it pertains - Date of delivery goods/render service as per relevant supporting document (which?) Audit procedures (example): Delivery notes dated pre-year-end Sale should be recorded in sales journal of period under audit Delivery notes dated post year-end Sale should be recorded in sales journal of next period ( = Represents sample selection)

S UBSTANTIVE P ROCEDURES - C LASSIFICATION Risk: Sales over- or understated Audit evidence: Sales transaction classified as such in the financial records - From books of prime entry to ledgers - Sales account contain no non-revenue transactions Audit procedures: ? Risk: Sales over- or understated Audit evidence: Sales transaction classified as such in the financial records - From books of prime entry to ledgers - Sales account contain no non-revenue transactions Audit procedures: ?

15 S UBSTANTIVE P ROCEDURES - C OMPLETENESS Risk: Sales understated -> reduced taxable income Audit evidence: Proof that all sales transactions that took place, have been recorded in fin records - All transactions written up on supp doc. - All supp doc. recorded in fin records - Analytical procedures: results don’t point to possible understatement Direction of testing: ? Population for sample: ? Audit procedures: ? Risk: Sales understated -> reduced taxable income Audit evidence: Proof that all sales transactions that took place, have been recorded in fin records - All transactions written up on supp doc. - All supp doc. recorded in fin records - Analytical procedures: results don’t point to possible understatement Direction of testing: ? Population for sample: ? Audit procedures: ?

S UBSTANTIVE P ROCEDURES - C OMPLETENESS Risk: Sales understated -> reduced taxable income Analytical procedures: Example 1: Prior year sales = R1.3 million Current year sales = R1.1 million However, there were price increases and market share increased. Why the decrease in sales? = RISK of completeness of sales. Risk: Sales understated -> reduced taxable income Analytical procedures: Example 1: Prior year sales = R1.3 million Current year sales = R1.1 million However, there were price increases and market share increased. Why the decrease in sales? = RISK of completeness of sales.

Analytical procedures Sales returns as % of sales. Reasonable compared to prior year / auditor expectation?  If much higher %: possible overstatement.  If much lower % : possible understatement. S ALES R ETURNS A ND A LLOWANCES S UBSTANTIVE P ROCEDURES - S ALES R ETURNS = RISK  Occurrence: approval?  Accuracy: recorded i.t.o. supp doc?  Completeness: all recorded?  Cut-off: If returns material, recorded in same period as the related sales.  Occurrence: approval?  Accuracy: recorded i.t.o. supp doc?  Completeness: all recorded?  Cut-off: If returns material, recorded in same period as the related sales. Further substantive procedures

Thank you! Dankie! Enkosi Kakhulu! END