This document provides an overview of the revenue and receivables cycle, including key activities, documents used, internal controls, and risks. It discusses financial statement assertions related to revenue and receivables, important accounting standards, and procedures for testing controls and substantive audit procedures. The revenue and receivables cycle includes activities like receiving customer orders, processing sales, invoicing, recording receipts, and credit management. Strong internal controls and audit procedures help ensure accurate financial reporting and mitigate fraud risks in this cycle.
3. Cycle Objectives:
➢ Financials Statement assertions and
revenue and receipts cycle
➢ Important Accounting Aspects
➢ Fraud in the Cycle
➢ Test of Control
➢ Substantive procedures
5. ❑ Major activities of a revenue and
receipt cycle
✓ Receiving customer orders
✓ Authorising the sale
✓ Processing the order
✓ Despatch
✓ Invoicing
✓ Recording sales and raising debtors
✓ Receiving and recording payments
from debtors
6. ❑ Documents Used in the Cycle
• Customer order
• Internal sales order
• Picking slip
• Delivery note
• Statement
• Credit application
form
• Receipt
• Remittance advice
• Credit note
• Deposit slip
• Price list
• Back-order note
• Goods returned
voucher
7. ❑ Characteristics of Good Internal
Control
▪ Control environment
▪ Competent trustworthy personnel
▪ Segregation of duties
▪ Isolation of responsibilities
▪ Access/ custody control
▪ Source of document design
▪ Comparison and reconciliation
9. A. Receiving Customer Orders (Order Department)
Function Documents
Record
Risks Control
Procedures
B. Sales Authorization (Order Department)
Function Documents
Record
Risks Control
Procedures
C. Warehouse
Function Documents
Record
Risks Control
Procedures
D. Despatch
Function Documents
Record
Risks Control
Procedures
10. E. Receipts Mail Room / Cashier
Function Documents
Record
Risks Control
Procedures
F. Recording of Receipts
Function Documents
Record
Risks Control
Procedures
G. Goods Returned by Customer
Function Documents
Record
Risks Control
Procedures
H. Credit Management
Function Documents
Record
Risks Control
Procedures
15. ▪ Sales
• Sales actually occurred, they are not
fictitious and pertain to the entity
(Occurrence)
• Sales are recorded at the correct amount
(Accuracy) and are allocated to the proper
accounting period (cut-off)
• All sales have been recorded (Complete)
and in proper accounts (classification)
16. ▪ Receipts
• The payment from debtor (receipts) actually
occurred and it pertain to the entity
(occurrence)
• The receipts are recorded at the correct
amount (accuracy) and are allocated to the
proper accounting period (cut-off)
• All receipts have been recorded
(completeness) in the proper accounts
(classification)
17. ▪ Debtors and bank/ cash balances
• Debtors and bank/cash balances actually
existed at balance sheet date (existence)
• The company had the rights to the debtors
and bank balances; i.e they were not encumbered in
any way (if they are, disclosure must be done) (rights)
• All debtors and bank/cash balances are
included at the balance sheet date
(completeness)
• Debtors have been reflected at an
appropriate carrying value (i.e suitable
allowance has been made for non-recoverable debts
(valuation), and bank/ cash balances are carried at their
correct “value” (Valuation)
18. Sales of Goods and rendering of service
• Significant risk and rewards of ownership have
been transferred from the seller to the buyer, e.g the
transfer could be evidenced by a delivery note, signed by the
customer, or a contract detailing the legal title transfer
• The seller does not retain continuing managerial
involvement, nor effective control over the goods
sold e.g consignment stock sent to an agent will not
constitute a sale.
• The amount of revenue can be measured reliably,
e.g this is usually straightforward as sales values will be
reflected on the invoice
• The flow of economic befit into the entity
2. Important Accounting Aspects: Revenue
and Receipts Cycle (IAS 18)
19. 3. Fraud in the Cycle
Fraudulent Financial Reporting
❑ Creating fictitious sales (occurrence) and the
corresponding fictitious debtors (existence)
❑ Understating sales (completeness) and the
corresponding debtors
❑ Misappropriation of Assets
❑ Lapping / Rolling
20. 4. Test of Control and Substantive Procedures
Test of Control
o Observation
o Enquiry
o Inspection
o Re-performance
Substantive Procedures
o Enquiry and confirmation
o Inspection
o Re-performance
o Recalculation
o Analytical procedure
21. 5 Test of Control
Procedures
➢ Enquire of the order clerk whether
• All orders are directed to him/her
• Him/her makes out an internal sales order for all
orders, not only phone orders
➢ Inspect filed copies of internal sales orders for
evidence that credit approval was obtained
➢ Observe the opening of mail and writing out of
receipts
➢ Observe the despatch clerk counting and checking
goods on transfer from warehousing to despatch
➢ Re-perform a bank reconciliation
22. 6 Substantive Procedures
SP for the Audit of Debtors
❑ Assertion: rights (the company control or holds the rights
to debtors)
By inspection of:
• Prior year workpapers
• Minutes of directors
❑ Assertion: existence (debtors included in the balance
actually exist, they are not fictitious)
• Debtors circulation
• Subsequent receipt testing
• “Cut-off”
23. ❑ Assertion:Valuation and allocation – Gross amount
(debtors are included in the financial statements at
appropriate amounts)
▪ Gross amount
▪ Bad debts allowance
❑ Assertion: Completeness (all debtors which should be
recorded have been recorded)
▪ Cut off testing
▪ Completeness of credit sales
24. ❑ Assertions relating to presentation and disclosure
▪ The auditor must inspect the financial statement disclosure
and consider whether:
✓ They are complete in terms of International Accounting
Standards and the 4th Schedule
✓ They are consistent with evidence gathered on the
audit
✓ Amount, facts, details etc are accurate and agree with
the evidence gathered
✓ Any classification of the information disclosed is proper
✓ The wording of the disclosure is clear and
understandable e.g the accounting policy and the
explanation of any encumbrances
25. ❑ A comparison of the master file at this year end may be
compared to last year’s master file (if available) be able to
identify:
• New accounts e.g could be traced to credit application
to assist in substantiating existence of the debtors
• Major fluctuation in individual account balances
• Debtors no longer listed
❑ List of debtors who have exceeded their credit limits or
terms, or particular threshold can be extracted
❑ Computations of bad debt allowance can be carried out
independently, e.g 3% of the debtors over 60 days. 8 % of
debtors over 90 days, etc and compared to the client’s
allowance.
26. 7 The use of Audit Software (Substantive
Procedures)
❑ The debtors master file can be stratified by rand amount,
customer profile etc, and sample selected for circulation,
and / or aging.
❑ The master file can be scanned for “error” conditions:
• Duplicated account numbers
• Negative balances
• Blank fields, e.g no account number, no name
❑ Debtors balances can be independently totalled for
comparison with client listing, and totals of monthly break
down (aging) can be agreed to the total amount owed.
❑ List of debtors who have a unique characteristic identified
on their record can be extracted, e.g the code may have been
added to the debtors masterfile to indicate that the debtor has been handed
over to the lawyers
27. 27
Committee Members Number of members Chairman
Audit Independent, non-executive
members
At least 3 Independent, non-executive
member
Nominations Non-executive members,
majority should be independent.
Chairperson of the governing
body should be a member.
At least 3 Chairperson of the governing
body may be elected as
chairman.
Risk Executive and non-executive
members, majority of whom are
non- executive.
Chairperson of the governing
body may be a member.
At least 3 Chairperson of the governing
body may be elected as
chairman.
Remuneration Non-executive members,
majority should be independent.
At least 3 Non-executive member
Chairperson of the governing
body should not be elected as
chairman.
Social and ethics Executive and non-executive
members, majority of whom are
non- executive.
Chairperson of the governing
body may be a member.
At least 3 Chairperson of the governing
body should not be elected as
chairman.
