Topic substantive testing for receivables and revenue f8 acca

Topic substantive testing for receivables and revenue f8 acca Topic substantive testing for receivables and revenue f8 acca Topic substantive testing for receivables and revenue f8 acca

Substantive Testing for Receivables and Revenue

ACCA F8 Audit and Assurance

Prepared by Admin

Updated: July 2025

Introduction to Receivables and Revenue Audit

Context

Auditing receivablesandrevenuein the sales and collection cycle is acornerstone of ACCA F8, ensuring financial statements are free of materialmisstatements

High-risk area due to potential for revenue manipulation

Critical for stakeholder confidence in financial reporting

Objective: Gather sufficient and appropriateevidence for key

assertions

Frequently tested in F8 exams with straightforward questions

Audit Cycle Grouping

Financial Statement Pairings

Balance sheet and income statement items are grouped into audit cycles:Treasury: Cash and bank balances

Sales Cycle: Receivables and revenue

Inventory Cycle: Inventory and cost of goods sold

Purchasing Cycle: Expenses and payables

Payroll Cycle: Payroll expenses and employee payables

Fixed Assets: Non-current assets and depreciation

Equity: Capital and reserves

Grouping streamlines audit focus on related transactions

Exam Question Types

Common Formats

1 Describe substantive proceduresfor revenue or receivables (e.g., Dec2018)

2 Specify procedures for specific assertionslike accuracy or

completeness (e.g., Dec 2017)

3 Identify risksin the sales cycle and propose audit responses

4 Evaluateinternal control weaknesses in the sales cycle

Questions are direct, often split into parts with 35 points each

Audit Process for Receivables and Revenue

Three Phases

1 Planning: Understand the client, assess risks at financial statement

andassertionlevels

2 Tests of Controls: Evaluate the effectiveness of internal controls in

the sales cycle

3 Substantive Testing: Perform procedures to gather evidence on

assertions, addressing identified risks

Focus today: Substantive testing for receivables and revenue

Key Assertions for Revenue

Profit and Loss Assertions

Occurrence: Revenue transactions recorded actually occurred.

Completeness: All revenue transactions are recorded.

Accuracy: Revenue amounts are correctly recorded, including

discounts and taxes

Cut-off: Revenue is recorded in the correct accounting period.

Example: Ensuring sales are not fictitiously recorded to boost reportedrevenue

Key Assertions for Receivables

Balance Sheet Assertions

Existence: Recorded receivables exist and are owed to the entity Rights and Obligations: The entity has legal rights to collect

receivables

Completeness: All receivables owed are recorded.

Accuracy, Valuation, Allocation: Receivables are recorded at

correct amounts, with appropriate provisions

Example: Verifying receivables are not overstated due to uncollectibledebts

Substantive Testing Overview

Purpose

Substantive tests verify assertions by gathering sufficient and appropriateevidence, addressing risks from planning and control testing

Types of procedures:

Analytical Procedures: Identify unusual trends or anomalies.

Tests of Details: Include inspection, confirmation, recalculation, and

enquiry.

Tailored to specific assertions and client-specific risks

Analytical Procedures for Revenue

Tests of Details: Cut-off for Revenue

Tests of Details: Accuracy for Revenue

Tests of Details: Completeness for Revenue

Analytical Procedures for Receivables

Supports Accuracy and Valuation

Example: A 90-day collection period vs industrys 60-day average mayindicate valuation issues

Enquiry for Receivables

Confirmation for Receivables

Key Procedure

Send positive confirmation lettersto customers to verify receivable

balances, ensuring independent, writtenevidence

Supports ExistenceandRights and Obligations

Positive (preferred): Customers confirm agreement or provide details Negative: Customers respond only if they disagree (less reliable, used

only in low-risk scenarios)

Confirmation Sampling Strategy

Key Sampling Criteria

Select receivables with:

Overdue balances: Indicate valuation risks

Credit balances: May require reclassification as payables

Large balances: Material to financial statements

Zero balances: Confirm accuracy of clearing

Round sum payments: Potential red flag for errors or fraud

Example: Confirm a $100,000 overdue balance to assess collectability

Handling Confirmation Issues

Non-Responses or Exceptions

Non-Responses: Perform alternative procedures, e.g., review

post-year-end payments, inspect invoices, or discuss with

Inspection: Key Receivables Documents

Core Documents

Individual Sales Ledger Accounts: Detail per customer.

Sales and Receivables Ledger: Aggregate transactions.

Aged Receivables Listing: Breakdown by age of debt.

Aged Trial Balance: Summary of receivables balances.

Essential for verifying Completeness,Existence,Valuation

Inspection Procedures for Receivables

Example: A 180-day overdue balance may require a bad debt

provision

Additional Inspection Procedures

Exam Example: D Co (Dec 2018)

Scenario

D Co, a paint manufacturer (year-end 30.9.20X9), reports:

Plans to list publicly within 12 months, increasing risk of revenueoverstatement

16.8% revenue increase, gross margin up from 36.4% to 37.3%

Product recall and discontinued product line, risking unrecordedreturns

Price Promise policy, allowing refunds for price differences, riskingunrecorded liabilities

D Co: Risks and Assertions

Risks and Affected Assertions

IPO Pressure: Risk of overstated revenue (Occurrence,Accuracy)

Revenue Increase: Possible manipulation or errors (Occurrence,Cut-off)

Product Recall: Unrecorded returns may overstate revenue

(Completeness)

Price Promise: Unrecorded refund liabilities may inflate revenue

(Accuracy)

D Co: Substantive Procedures

Verify sales prices against price lists (Accuracy)

Trace recalled product sales to credit notes (Completeness)

Exam Example: D Co (Dec 2017)

Scenario

D Co, a womens clothing manufacturer (year-end 31.7.20X9), reports:Profit before tax: $2.6m, total assets: $18m

Receivables are material, requiringpositive confirmation

Task: Describe substantive procedures (excluding confirmations) forAccuracy,Completeness, andRights and Obligations

D Co: Procedures for Receivables Assertions

Accuracy and Valuation

Reviewpost-year-end collectionsto confirm balances (Valuation).Analyze aged receivablesfor overdue items, discuss provisions

Rights and Obligations

Reviewloan agreements for pledged receivables (Rights)

Conclusion and Exam Tips

Exam Tips:

Link scenario details to specific risks and assertions.

Specify documents (e.g., aged receivables listing) and actions (e.g., trace, recalculate).

Practice with past papers (e.g., Dec 2018, Dec 2017) to master