Part Seven
Sales And Receivable Audit
Structure of Seminar
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1. Control objective and Control procedures
2. Tests of control
3. Substantive tests
4. Trade Receivable and prepayments
1. Control objective and Control procedures
2. Tests of control
• Sequence test check on invoice, credit note
,dispatch notes, and orders, ensure no omission
and duplicated
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Check the authorization for acceptance of
order, dispatch of goods, raising of the invoice
and credit note, pricing and discount, write off of
bad debt
• Seek evidence of checking arithmetical accuracy
Tests of control
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Check dispatch note and goods returned note
to ensure they are referenced to sales invoices
and credit note and vice versa
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Check the control account reconciliation has
been applied.
• Tests of control are designed to ensure that
controls within a given system exist and have
been operating effectively throughout the period.
3. Substantive tests
• Substantive tests are designed to identify
material misstatements. Substantive tests in
respect of sales focus primarily on whether or
not sales have been understated as a result of:
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Dispatches not being invoiced
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Invoices not being recorded
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Inaccurate invoices
Substantive tests
• The main tests are as follows:
• 1) Analytical review
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Compare levels of sales throughout the year
on a month by month basis
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Compare the sales in the last month of the
year to sales in the first month of the next year
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Financial and non-financial information to
confirm the sales level
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Substantive tests
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Compare with receivable days ratio
Compare of ageing debts to prior years
2) Accounting records
Check and cross-cast of sales day book
Check invoice are posted to ledger account
and control account
Check SDB—invoice—credit note—dispatch
note
Substantive tests
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Obtain a list of receivables balances in
receivable ledger account agree the total with
the control account
Test year end control account reconciliation
3) Invoice and credit notes
Check numerical sequence
Check sales invoice to SDB and receivable
ledger account
Substantive tests
• Compare invoiced price with authorized
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Check calculations of invoices
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Scrutinize credit note for large and unusual
items
• 4) Bad debts
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Previous experiences
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Evidence from confirmation of account
receivable
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Aged analysis of receivables
Substantive tests
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Post balance sheet events
• 5) Cut-off testing
• 6) Receivables
4. Trade Receivable and prepayments
• Risk
• There is a risk that debtors will be misstated
because:
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Not recoverable and the provision for bad and
doubtful debts is inadequate
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Fraud has occurred e.g. teeming and lading,
where receipts are posted to the wrong sales
ledger accounts to hide funds that have been
misappropriated.
Trade Receivable and prepayments
• 1) Debtors’ circularization
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Involves sending letters to a sample of
debtors asking them to confirm their balance at
the year-end.
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Provides third party, documentary evidence of
existence and rights and obligations
Trade Receivable and prepayments
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Circularization methods
• Positive
This is the most common method. Customers
are asked to reply directly to the auditors either
agreeing with the balance shown in the letter, or
disagreeing and stating the balance per their
records.
• Negative
• Customers are asked to reply only if they
disagree with the balance shown. This method is
Trade Receivable and prepayments
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appropriate if the client has good internal control
and there are a large number of small value
accounts. It is however rarely used in practice.
Procedure
Letters and replies
Preferably sent out after the year end (otherwise
additional procedures required)
On the company's letterhead and signed by the
client
Enclose a copy of the customer's year end
statement
Trade Receivable and prepayments
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Letters posted by the auditor.
All replies should be sent directly to the
auditor in a prepaid envelope.
Sample
Material balances
Old unpaid accounts
Accounts
Written-off during the period under review
With credit balances
Settled by round sum payments
With nil balances
Trade Receivable and prepayments
• Follow up: failure to respond
• Positive circularization only
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Send a second letter within 2 weeks
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Fax a copy of the letter to the customer
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Contact the customer by telephone
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Ask a responsible official independent of the
sales ledger department, to investigate
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Adopt alternative procedures
• Follow up: disagreements
Trade Receivable and prepayments
• Positive and negative circularization
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Dispute
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identify reason
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consider need for provision
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cut off problems (invoices or cash receipts)
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Extend cut off testing?
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receipts posted to wrong account
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Evidence of other miss posting?
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Trade Receivable and prepayments
• customers who are also suppliers netting off
balances
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Allowed?
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Teeming and lading
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detailed testing of cash receipts if suspected
• Alternative procedure
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check cash after date
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agree to specific
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verify valid sales orders end delivery notes
Trade Receivable and prepayments
• All disagreements and non-replies must be
followed up and their effect on total debtors
evaluated.
Trade Receivable and prepayments
• 2) Bad and doubtful debts
• Provides assurance in respect of ap
• propriate carrying value.
• Procedures:
Stage 1: Identify doubtful debts
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Check the aging on the aged debtors report
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Discuss with the directors all balances
—over 60 to 90 days old
—with round sum payments
Trade Receivable and prepayments
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—the credit controller identifies as being
doubtful
Review correspondence from
customers
lawyers
debt collection agencies
Examine credit notes issued after the year
end.
Trade Receivable and prepayments
• Stage2: Review provisions
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Specific provisions
— necessary?
— adequate?
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General provisions
— calculation correct
— consistent with prior years
— compare prior year provision to actual bad
debts incurred
Trade Receivable and prepayments
• 3) Cut off testing
• For a sample of pre year end GDN agree
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excluded from inventory records
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invoices in sales & debtors
• For a sample of post year end GDN agree
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included in inventory records
— invoices not in sales or debtors
Trade Receivable and prepayments
• Sample of pre year end goods returns notes
agree
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included in inventory—records
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credit notes in returns & debtors
• Sample of post year end goods returns notes
agree
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excluded from inventory records
— credit notes not in returns or debtors