I.AUDIT PROCEDURE
Revenue is important to the audit because it’s one of the two major business processes, and purchasing is the other.
| Assertion | Control objectives | Audit Procedure |
| Occurrence
and existence |
To ensure that recorded
sales transactions represent goods or services provided. |
For a sample of sales
invoices ensure there is a related sales order form that has been authorised and shipping documentation.
Review entity’s procedures for sending out monthly statements and dealing with customer queries and complaints.
|
| To ensure that goods and
services are provided at authorised prices and on authorised terms. |
Verify that price lists
and terms of trade are properly documented, authorised and communicated.
Examine application controls for authorised prices and terms. |
|
| Completeness | To ensure that all
revenue relating to goods dispatched is recorded. |
Review and test entity’s
procedures for accounting for numerical sequences of invoices. |
| To ensure that all goods
and services sold are correctly invoiced. |
For a sample of
shipping/despatch documents, ensure each has been matched to a related sales invoice that was subsequently recorded. |
|
| Accuracy | To ensure that all sales
and adjustments are correctly journalised, summarised and posted to the correct accounts. |
Review supporting
documents for a sample of sales entries to ensure they contain the written details that indicate they were referred to when entered. |
| Cut-off | To ensure that
transactions have been recorded in the correct period. |
Compare dates on sales
invoices with dates of corresponding shipping documentation.
Compare dates on sales invoices with dates recorded in the sales ledger. |
| Classification | To ensure that all
transactions are properly classified in accounts. |
Inspect any
documentary evidence of review.
Test application controls for proper codes. |
II.Analytical Procedures Related to Revenue Accounts
Budget to Actual Comparisons
Using budgeted revenue amounts and comparing those to actual amounts allows auditors and managers to see which revenue accounts varied from predicted numbers.
Prior Year to Current Year Comparisons
Comparing current year financial statements to prior year financial statements is another way to review revenue accounts.
Industry Competitor Comparisons
Reviewing the gross margin of various competitors is another way to analyze a company’s performance. Gross margin is the percentage of revenue the company retains after subtracting its cost of goods sold.
Using Relevant Nonfinancial Information
For example, nonfinancial information, such as weather history, can be helpful for industries whose demand fluctuates relative to the weather.
Practical Questions
Draft statement of profit or loss for ABC Company as follows:
| Year 2017 | Year 2018 | |
| Sale | 500,000 | 550,000 |
| Cost of goods sold | (300,000) | (380,000) |
| Gross Profit | 200,000 | 170,000 |
| Operating Expenses : | ||
| Salary for Admin Department | 48,000 | 52,800 |
| Salary for Marketing & Sale Department | 72,000 | 97,200 |
| Electricity Expense | 1,200 | 1,320 |
| Distribution cost | 20,000 | 26,000 |
| Commission | 5,000 | 7,000 |
| Office Rental | 7,200 | 7,200 |
| Warehouse Rental | 15,600 | 20,280 |
| Total Operating Expense | 169,000 | 211,800 |
| Profit before tax | 31,000 | (41,800) |
Required
Perform analytical procedures on the draft statement of profit or loss to identify possible risk areas requiring further audit work for 2018.
Answer
| Year 2017 | Year 2018 | Increase(decrease) | |||||
| Sale | 500,000 | 550,000 | 50,000 | 10.00% | |||
| Cost of goods sold | -300,000 | -380,000 | 80,000 | 26.67% | 60% | 69% | CoGS/Sale |
| Gross Profit | 200,000 | 170,000 | -30,000 | -15.00% | 40% | 31% | Gross profit/sale |
| Operating Expenses : | 0 | ||||||
| Salary for Admin Department | 48,000 | 52,800 | 4,800 | 10.00% | |||
| Salary for Marketing & Sale Department | 72,000 | 97,200 | 25,200 | 35.00% | |||
| Electricity Expense | 1,200 | 1,320 | 120 | 10.00% | |||
| Distribution cost | 20,000 | 26,000 | 6,000 | 30.00% | |||
| Commission | 5,000 | 7,000 | 2,000 | 40.00% | |||
| Office Rental | 7,200 | 7,200 | 0 | 0.00% | |||
| Warehouse Rental | 15,600 | 20,280 | 4,680 | 30.00% | |||
| Total Operating Expense | 169,000 | 211,800 | 42,800 | 25.33% | |||
| Profit before tax | 31,000 | -41,800 | -72,800 | -234.84% | |||
| Risk | |||||||
| 1. Decrease revenue | |||||||
| expense may be correct but decrease revenue | |||||||
| More: audit salary of marketing & sale department is real for decreasing revenue ? | |||||||
| 2. Increase expense | |||||||
| Revenue may be correct but increase expense | |||||||
| Other example | |||||||
| 1000 | selling price | 1020*10 | 10200 | ||||
| 800 | cost of sale | 800 x 10 units | 8000 | ||||
| 80% | 78% | ||||||