Audit Procedures for Testing Sales Revenues (Risks and Assertions Included)


The audit procedure is one of the most important things that auditors need to ensure that they are well and correctly prepared, tailored, and executed to minimize audit works and reduce audit risks.

Sales revenues are one of the sensitive areas that auditors need to place their great attention on since it is the high risks areas in terms of nature and significant in terms of amount record in the financial.

Also, because it is mater so much on the users of financial statements, sale revenues are also the sensitive areas where the risks of manipulation, risks, or errors are likely to happen on most of the entities.

Before we talk about the audit procedure for testing revenues and the assertion that auditors used, it is beneficial to start by understanding the nature of revenues in the financial statements, the key internal control over financial reporting, financial assertion, and common risks that usually happen to the revenues.

Now let talk about the internal control related to the revenue and why auditors need to understand it.

Understanding Internal Control:

Understanding how an entity sets up internal control over revenues is fundamental for auditors to tailor the practical audit procedures to address all possible risks.

The key internal control that auditors should look into is mainly related to price authorization, goods or services delivery, revenues recording, billing, and collection.

These processes are also important for management to address the assertion of financial statements related to revenues, not only the auditor.

The following are the key financial statements assertion related to revenues. These assertions are used by management to ensure that the revenues are correctly and accurate records in the financial statements. And they are also used to making sure that the revenue is completely recorded in the period or year.

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On the other hand, auditors use these assertions to assess if management correctly implements that assertion or not. Here are the important assertions of revenues:

  • Completeness: This assertion concern the completeness of recording in the financial statements. The incomplete record of revenues might be happening for many reasons, including the entity’s process and procedure that could not capture all the revenues, errors, and sometimes fraud.
  • Cut off: cut off assertion concerning that revenues are recording in the different periods they belong to. This could cause the understated and overstate of revenues being shown in the income statement.
  • Occurrence: The auditor should consider assessing whether the revenues recorded in the period have really occurred. There are risks that revenues recorded might not occur.
  • Right and Obligation: Right and obligation are fundamental, and it concerns entity rights and obligation over the goods that are sold to customers. This is a link to the risks and rewards then auditors performing cut-off testing.
  • Factitious sales amount at the end of or during the year that is recording in the financial statements to reach a certain amount that could let top management get certain rewards like bonuses or incentives.
  • The sales team or sales manager might also commit a fictitious sales amount to get bonuses and inventive like top management.
  • Goods or services that are sold are not collectible. These might be the poor customer creditability assessment performed by sales managers or the poor internal control over the sales process.
  • Fraud over cash collection from the selling goods or services.
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Audit Procedures:

  1. Review the occurrence of the sale: This is performing by obtaining the sales transactions recorded in the financial statements during the period and the sales report that links to the financial statements. Then perform an audit sampling to the total population of those sales transactions to review against quotation, sales orders, invoices, contracts, and goods delivery noted. Ensure that the sampling items represent the total population. Otherwise, the conclusion might go wrong.
  2. Perform Sales Revenues Analysis could help auditors to identify the unusual event or transactions related to sales. For example, comparing the sales trend again the goods of goods sold or inventories. This analysis could help auditors perform additional reviews if they found that the trend goes in a different direction. There are many different methods to analyze the revenues that auditors could use, such as seasonal sales revenues, trend analysis of revenues, and related non-financial data.
  3. Review the sales price authorization. The fraud over this area is likely to happen. Of course, management is the one who handles managing and makes sure that fraud risk is protected and minimize. But, the auditor should also review the control over this area. Focus on unauthorized sales and unauthorized sales commission that link to performance inventiveness of the sales team and sales manager.
  4. Review the collectability: Sales increase is good, but the collectability of those sales amounts is important. Account receivable analysis should be performed, and credit policy should be review. Review the written-off amount of account receivable during the year and then assess its reasonableness.
  5. Review the sales recognition, whether the recognition of sales during the period are respecting the IFRS 15 or not. It is important to assess that the future economy related to sales will be inflow into the company and the sales amount is measurable.
  6. Review the completeness of revenue recording in the financial statements. Revenues might be understated if they are under-recording.
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