Unit 3
Revenue and Receipts cycle lecture 2
28 February 2025
LECTURE 1 - RECAP
Selling, receiving, Variation, cash
recording the sale sales, credit sales,
Overview
legislation
Documents
Evaluation of
int. controls Functions Risks
Control activities
Implementation
Weaknesses
LEARNING OUTCOMES
At the end of this lecture you should be able to:
1. Formulate and perform substantive procedures for revenue and
receipts cycle
2. Identify principles that determine the choosing of items for testing to
gather audit evidence
REVENUE AND RECEIPTS– AUDITING THE CYCLE
ASSERTIONS?????
Within the annual financial statements, is what we call
assertions of management which are the
presentations/ confirmations of assets, equity, liabilities,
transactions and events, which should also be verified
by the auditor.
In simple terms, “assertions” are certain claims that
management (Board of Directors) are making about the
items included in the Financial Statements.
Also referred to as management assertions or
financial statement assertions.
REVENUE AND RECEIPTS– AUDITING THE CYCLE
RECEIPTS
REVENUE/ TRADE
(from trade
SALES RECEIVABLES
receivables)
OCCURRENCE OCCURRENCE EXISTENCE
ACCURACY ACCURACY RIGHTS
ACCURACY, VALUATION
CLASSIFICATION CLASSIFICATION
AND ALLOCATION
CUT-OFF CUT-OFF CLASSIFICATION
COMPLETENESS COMPLETENESS COMPLETENESS
PRESENTATION PRESENTATION PRESENTATION
REVENUE AND RECEIPTS– AUDITING THE CYCLE
SUBSTANTIVE
Substantive
PROCEDURES
SUBSTANTIVE
ANALYTICAL
TEST OF
PROCEDURES
DETAILS
REVENUE AND RECEIPTS– AUDITING THE CYCLE
NB: Auditor should understand risk facing the entity
FRADULENT FINANCIAL REPORTING MISAPPROPRIATION OF ASSETS
Fictitious sales (occurrence) and debtor Theft of cash from cash sales (completeness)
(existence)
Understating sales and debtor (completeness) Theft of payments or receipts from debtors
(completeness)
Understating bad debts allowance (Accuracy, Arranging sales to customers at unauthorized
valuation and allocation) reduced price & not recorded (Accuracy, valuation
and allocation)
Manipulating the recognition of revenue (cut-off, Theft of goods at picking or despatch area
completeness) (existence of inventory)
Not paying over VAT on sales (completeness of
liabilities, Accuracy of sales)
Making invalid adjustments to debtors account
(Accuracy, valuation and allocation)
Despatching goods but never invoice
(completeness)
ACCOUNTING (SALE)
ACCOUNTING (SALE)
Why
SFP
Date Account name/description Dr Cr
21/02/21 Accounts Receivables 19952.5
Revenue 17350
VAT 2602.5
ACCOUNTING (SALE)
Statement of comprehensive income for the year
ended 31 March 2021
2020 2021
Revenue R300 000 R400 000
Cost of sales (R150 000) (R200 000)
Gross profit R150 000 R200 000
• Total of all sales transactions for
the year.
• They are all recorded in a sales
journal.
• The sale in previous slide will
included in this amount
Step 1: Select a sample of those sales
transactions (from sales journal)
REVENUE AND RECEIPTS– AUDITING THE CYCLE
OCCURRENCE OF SALES - Recorded transactions occurred
and they pertain to the entity.
Select a sample of recorded sales and perform the following:
1. Inspect the customer order to confirm that it has been received from an
approved customer
2. Inspect the picking slip and dispatch note for the goods invoiced and confirm
that they have been signed by the picker and dispatcher.
3. Inspect the sales invoice to confirm that goods sold to the customer were the
type sold by the company.
4. Inspect the sales invoice to confirm that it has been made in the name of the
entity
5. Inspect the delivery note for signature of the customer to confirm that the
goods have been delivered to the customer.
Refer to prescribed book for details
REVENUE AND RECEIPTS– AUDITING THE CYCLE
Why
CUSTOMER ORDER
Bakwena Constructions (PTY) LTD PO number: 46532
13 Commisioner Street Braamfontein PO date: 16 February 2021
Johannesburg, 2109
Purchase from: Ship to:
Sego Builders (PTY) LTD Bakwena Constructions (PTY) LTD
29 Makhosi Road Diepkloof 13 Commisioner Street Braamfontein
Johannesburg, 2109 Johannesburg, 2109
Contact name: Contact name:
Malebo Skhosana: 011 559 4061 Thulani Shabangu: 011 335 6745
Items description Quantity Unit price Amount
AfriSam All Purpose cement 100 R76.00 R7,600.00
Mampara bricks 1500 R6.50 R9,750.00
Approved by: Subtotal: R17,350.00
Sales tax R2,602.50
C.M Nhlapheng - Buying clerk Order total R19,952.50
REVENUE AND RECEIPTS– AUDITING THE CYCLE
Why
Sego Builders (PTY) LTD
29 Makhosi Road Diepkloof
Johannesburg, 2109
INVOICE
Bakwena Constructions (PTY) LTD Date: 21 February 2021
13 Commisioner Street Braamfontein Order name: 46532
Johannesburg, 2109 Invoice number: IN463
Items description Quantity Unit price Amount
AfriSam All Purpose cement 100 R76.00 R7,600.00
Mampara bricks 1500 R6.50 R9,750.00
Subtotal: R17350
T ax: R2602.50
T otal amount due: R19952.50
Authorised signature
T HA NK Y OU . CA L L A GA I N
REVENUE AND RECEIPTS– AUDITING THE CYCLE
Why
DELIVERY NOTE
To: Bakwena Constructions (PTY) LTD Order number:46532
Address: 13 Commissioner Street Date sent: 21 February 2021
Braamfontein Per invoice number: IN463
Johannesburg Our contact person: Thulani Shabangu
Attention CM Nhlapheng Telephone: 011 335 6745
QUANTITY DELIVERED DESCRIPTION
100 AfriSam All Purpose cement
1500 Mampara bricks
Goods delivered in good order
Name: JS Sbiya Signature: Date: 21 February 2021
Name: K Mkhonto Signature: Date: 21 February 2021
REVENUE AND RECEIPTS– AUDITING THE CYCLE
Self-study
SUSBTANTIVE PROCEDURES FOR
THE REST OF THE ASSERTIONS!!
SUBSTANTIVE ANALYTICAL PROCEDURES
The auditor will supplement his tests of detail by conducting some
analytical procedures.
ELECTRICITY EXPENSE EXPENSES
900
800
700
600 Electricity
500 30% Interest expense
400 Depreciation
300
60%
200 10%
100
0
January February March April
2020 2019
Figure 1 Figure 2
ACTUAL EXPENSES
VS
BUDGETED EXPENSES
TYPES OF AUDIT PROCUDURES
1. Risk assessment
2. Test of controls
3. Substantive test of details Substantive
4. Substantive analytical procedures procedures
LEARNING OUTCOMES
Remember the outcomes?
1. Formulate and perform substantive procedures for revenue and
receipts cycle
2. Identify principles that determine the choosing of items for testing to
gather audit evidence