Classes of Transactions (sales and Revenue)

Occurence (High Risk)

Concern: recording fictitious sales or recording sales before shipment

Test: Select a sample of entries from the Sales Journal and vouch back to supporting Bills of Lading

Completeness

Concern: Goods shipped but never invoiced or recorded (unrecorded revenue).

Test: Select a sample of Bills of Lading and trace forward to sales invoices and into the Sales Journal.

Accuracy

Concern: Invoicing incorrect unit prices or arithmetic errors on invoices.

Test: Compare prices on sales invoices against an authorized price list and recalculate mathematical extensions and footings.

Cutoff

Concern: Shifting revenue into the wrong period around year-end.

Test: Compare shipping dates on bills of lading for a window right around year-end against recording dates in the sales journal, checking FOB terms

Classification

Concern: Misclassifying non-operating transactions (e.g., selling fixed assets or intercompany transfers) as normal customer revenue.

Test: Inspect sales invoices to verify they are credited to the proper revenue GL account code.

Existence (Period end account balances)

Concern: Overstated or fictitious receivables.

Test: Send external accounts receivable confirmations directly to customers.

Rights and Obligations (Period end account balances)

Concern: Pledged, factored, or sold receivables still listed on the balance sheet.

Test: Inquire of management and review bank confirmations, loan agreements, and board minutes for evidence of factoring or liens on receivables.

Completeness (Period end account balances)

Concern: Omitted customer balances from the aged trial balance.

Test: Reconcile the total of the A/R subledger to the general ledger control account.

Valuation and Allocation

Concern: A/R is recorded at gross rather than net realizable value (NRV); inadequate Allowance for Doubtful Accounts.

Test: Review the aging categories on the aged trial balance, test subsequent write-offs and collections, and evaluate the reasonableness of the allowance percentage based on historical default rates and current credit conditions.