Auditing Trade Receivables and Revenue Cycle Substantive Procedures

Flashcards covering audit substantive procedures for the revenue and receipts cycle, focusing on trade receivables assertions (rights, existence, accuracy/valuation, completeness, classification, and presentation) and bank and cash fundamentals.

How should sales be reflected in the statement of comprehensive income according to substantive presentation procedures?

Sales should be reflected as a single aggregated line item in the statement of comprehensive income.

Which substantive procedures should an auditor perform to test the rights assertion for trade receivables?

By enquiry of management and inspection of prior year work papers, minutes of directors' meetings, loan agreements, and bank confirmations to determine whether receivables have been factored, ceded, or encumbered.

What are the two major substantive procedures for testing the existence assertion of trade receivables?

Debtors circularisation (independent confirmation sought from the debtor with management's consent) and subsequent receipts testing (matching amounts owed at year-end to payments received after year-end).

What is the difference between a positive circularisation and a negative circularisation request?

A positive confirmation requests that the debtor confirm whether the balance on the statement is correct or not, whereas a negative confirmation requests that the debtor confirm only if the balance on the statement is not correct.

Why does a non-returned negative circularisation provide very little audit evidence for existence?

A non-return could mean that the debtors balance is correct, that the letter went to a fictitious debtor, or that the debtors balance is incorrect but in favour of the debtor.

What specific steps must the auditor take when supervising the mailing of debtors statements during circularisation?

The auditor stamps all envelopes to direct 'addressee unknown' statements to the auditor's address, and tests debtors with 'PO Boxes' to confirm they are not fictitious (e.g., looking them up in business directories and telephonically confirming).

How should an auditor follow up on disagreements reported by debtors during circularisation?

By reference to relevant source documentation, discussion with the credit controller, and, if necessary, follow up with the client's attorneys.

How should an auditor follow up on positive circularisation 'no replies' and 'addressee unknowns'?

By re-circularising the debtors concerned (after correcting the address if necessary), making telephone or fax enquiries, and referencing receipts after year-end for evidence of subsequent payment.

What are the key steps involved in subsequent receipts testing for trade receivables?

Select a sample of debtors from the year-end list, identify subsequent payments in the cash receipts journal, trace to remittance advices, and inspect invoices and matching delivery notes to confirm they are dated prior to year-end and included at year-end in the sales journal and debtors ledger.

What procedures should be performed on the reconciliation between the debtors list and the debtors control account if reconciling items exist?

Casts, testing of the reconciliation logic, and follow up of reconciling items.

How should debtors invoiced in a foreign currency be tested for valuation?

Obtain exchange rates at transaction date and year-end date from a financial institution, multiply foreign currency invoice amounts by each rate, and inspect the debtors account to confirm the balance was calculated using the financial year-end rate.

Why is establishing an allowance for bad debts by applying a fixed percentage to gross debtors generally unacceptable?

Potentially uncollectible debtors should be provided for on a debtor-by-debtor basis, unless there is very strong historical evidence that the percentage chosen is an accurate reflection.

How does an auditor re-perform the aging of debtors when evaluating the bad debts allowance?

By selecting a small sample of debtors and tracing amounts owed back to source documents (such as sales invoices and receipts) to determine whether they have been allocated to the correct time period in the age analysis.

Why is cut-off testing conducted to verify the completeness assertion of trade receivables?

To confirm that sales and debtors were correctly raised at year-end, addressing the risk that a company delays invoicing to the new year to 'get off to a good start.'

How is the classification assertion for trade and other receivables audited?

By enquiry of management as to policy and scrutiny of the debtors age analysis to confirm that only trade and other receivables expected to be paid or received within the next twelve months are included.

How must trade and other receivables be presented on the statement of financial position?

As a separate line item under current assets on the face of the statement of financial position, net of impairments.

From what date were cheques discontinued as an accepted form of payment in South Africa?

From 1 January 2021.