SUBSTANTIVE PROCEDURES

REVENUE AND RECEIPTS CYCLE

Assertion Sales(COT) Trade receivables (AB)

Occurrence/Existence  Obtain /request for the sales  Obtain a sample of debtors

(from ledger to ledger download from the debtors’ ledger.
source  Trace a sample of recorded  Circulate an external
documents/physical sales transactions back to confirmation to the sampled
asset) source and inspect the debtors.
supporting documentation  If the confirmations are not
e.g. the invoice, to confirm : returned, perform subsequent
 that an order was received receipt testing.
from an approved customer  Trace the year-end balance of
 That a picking slip and the debtors to the payments
despatch note for the goods received from the debtors
invoiced, duly signed by the after year-end and the
picker and despatcher and customer remittance advice.
that the goods invoiced to the
customer were of a type sold
by the company.
 Trace each sale in the sample
through to the cash receipts
journal/bank statement and
customer remittance advice
and by inspection, determine
whether a payment of the
correct amount for each
invoice.
 Inspect the bills of lading for
goods sold on FOB or CIF to
determine whether
significant risks and rewards
of ownership have been
transferred from the seller to
buyer

Accuracy/Valuation  Select a random sample of Gross amount

and allocation invoices and for each invoice
confirm the mathematical
accuracy of the invoice by
recalculating all extensions,
casts, discounts and VAT
calculations
 Confirm prices and discounts
charged and granted to
official price lists or other
sources Confirm that the
invoice is a valid tax invoice
 The debtors ledger should be
reviewed for unusual entries
e.g. credit balances The total
on the list of individual
debtors should be matched to
the debtors control account in
the general ledger and the
trial balance
 Reference should be made to
the results of any external
confirmations received
 (e.g. VAT registration number  Debtors ledger should be cast
is included) for debtors invoiced in a
 Agree the quantity and foreign currency i.e. obtain
description of the goods the amount of the sale in the
invoiced to the quantity and foreign currency by reference
description of the goods on to the invoice ,obtain, from a
the despatch note. financial institution, the
exchange rates at transaction
date and at the financial year
end date, and multiply the
amount by each of the two
rates
 Bad debts allowance(Please
follow these procedures for
all estimates/provisions)
 Enquiry should be made of the
method and procedures
adopted by management to
estimate the allowance for
bad debts
 The authorisation procedure
should be established and
evaluated, e.g. is it authorised
by the credit controller
 An assessment of whether
the basis of calculating the
allowance is reasonable and
consistent with the prior year
provision
 All calculations should be
reperformed
 The aging of debtors should
be reperformed by selecting a
small sample of debtors and
tracing the amounts owed
back to the source
documents.
 All long outstanding debtors
and material debtors outside
their credit terms, should be
identified and discussed with
credit management
 The debtors correspondence
and legal files should be
inspected to identify disputed
debtors and debtors who have
been handed over
 Enquiry of management
should be made as to any
matters which might affect

Cut-off/Rights  At year-end obtain the
document numbers of the
last documents used in the
financial year, e.g. sales
invoices, despatch notes
 During the year audit agree
this number to the last entry
in the sales journal
 Sequence test the last two
weeks of invoices before year
end, for any missing invoice
numbers
 Scrutinize the subsequent
month’s sales journal for any
invoice numbers lower than
the cut-off number.
Classification  Test transfers of amounts
from the monthly sales
journals (both cash and credit
sales) to the sales and VAT
accounts in the general ledger
to confirm that the amounts
were posted to the correct
account
 Inspect the sales account for
the inclusion of any amounts
which are recorded as
revenue, but do not
constitute sales, e.g. interest,
income, dividend income.
Completeness (source  Perform the following
documents/physical analytical procedures:
asset to the ledger)  analysis of gross profit
fluctuations comparisons of
sales/debtors to prior periods
 analysis of recorded sales by
characteristic for comparison
to prior periods, e.g. by
the allowance, e.g. relaxing of
the company’s credit terms.
 The actual bad debt write-offs
during the year under audit
should be compared to the
prior year allowance to obtain
an indication of the company’s
ability to set a reasonable
allowance
 By inspection of :
 prior year work papers
 minutes of directors’ meetings
 loan agreements
 bank confirmations, and
 By enquiry of management :
determine whether
receivables have been
factored, ceded or
encumbered in any way
 By enquiry of management as
to policy and scrutiny of
debtor’s age analysis confirm
that only trade and other
receivables that are expected
to be paid (received) within
the next twelve months are
included.
 Perform analytical procedures
(similar to those in the sales
column)
 E.g. comparing current year
debtors balance with prior
year balances.
 product, branch, region,
month,
 customer comparison of sales
ratios to prior periods, e.g.
sales commission to sales,
cash sales to credit sales

Presentation  Inspect the financial  Inspect the financial

statements to confirm that :
 Sales are reflected as a single
aggregated line item in the
statement of comprehensive
income
 Any disaggregation of sales in
the disclosure notes is
accurate, relevant and clearly
described, e.g. where sales
have been broken down
(disaggregated) to reflect
sales by product, location or
division
statements to confirm that :
 The trade and other
receivables appear as a
separate line item under
current assets on the face of
the statement of financial
position, net of impairments
 The disclosure in the notes
reflects trade receivables
before and after impairment
allowances.

Use of audit software (CAATs) for trade receivables.

1. The debtors ledger download can be stratified by amount, customer profile etc., and
samples selected for circularisation, and/or aging.
2. The master file can be scanned for “error” conditions:
duplicated account numbers
Negative balances
Blank fields, e.g. no account number, no name.
3. Debtors’ balances can be independently totalled for comparison with the client’s debtors
listing total, and totals by monthly break down (aging) can be agreed to the total amount
owed.
4. Lists of debtors who have a unique characteristic identified on their record can be extracted,
e.g. a code may have been added to the debtor’s master file to indicate the debtor has been
handed over to the lawyers.
5. A comparison of the master file at the current year end may be compared to last year’s
master file (if available) to identify: * new accounts (which could be traced to credit
applications to assist in substantiating existence of the debtor) * major fluctuations in
individual account balances * debtors no longer listed.
6. Lists of debtors who have exceeded their credit limits or terms, or a particular threshold can
be extracted.

*COT-Class of transaction (for income statement items e.g. sales, purchases, etc.)

*AB –Account balance (for balance sheet items e.g. assets and liabilities)