Page 182 - CA Inter Audit PARAM

CA Ravi Taori

QNO P&L (Whether Sales Overstated?) Old Course -- (M21E)
AIFS.45.50 Bhaskar CNO - AIFS-P3.020 New Course –(M24M)
CA "X" while conducting an audit of Joyful Ltd. found a considerable increase in sales as compared to the
previous year, he doubts that few fictitious sales have been recorded by the company to overstate its
revenues. Discuss any four audit procedures to be undertaken by the auditor to ensure revenue from
sales of goods and services performed during the period is not overstated?

OR
You are part of engagement team conducting audit of an entity engaged in manufacturing business. State
few audit procedures you would undertake to perform to verify that recorded sales in financial
statements represent goods actually sold during the period and recorded sales are not overstated.
Answer CA X, having doubts about fictitious sales being recorded by Joyful Ltd would ensure that revenue is
not overstated by performing following audit procedures:
Ensure revenue is not overstated by performing represent goods shipped/ services performed during
the period (OCCURRENCE)
following audit procedures:
◼ Check whether a single sales invoice is recorded twice or a cancelled sales invoice could also
be recorded.
◼ Test check few invoices with their relevant entries in sales journal.
◼ Obtain confirmation from few customers to ensure genuineness of sales transaction
◼ Whether any fictitious customers and sales have been recorded.
◼ Whether any shipments were done without the consent and agreement of the customer,
especially at the year end to inflate the sales figure
◼ Whether unearned revenue recorded as earned.
◼ Whether any substantial uncertainty exists about collectability.
◼ Whether customer obligations are contingent on other actions (financing, resale, etc.).

QNO P&L (Sales Accuracy) Old Course -- (N22M)
AIFS.45.55 Bhaskar CNO - AIFS-P3.020
While checking sales of the client, the auditor has to ensure that all sales are accurately measured as per
applicable accounting standards and correctly journalized, summarized, and posted. Explain the audit
procedures to ensure the same.
Answer While checking sales of the client, the auditor has to ensure that all sales are accurately measured
as per applicable accounting standards and correctly journalized, summarized, and posted. The
auditor can perform the following procedures to ensure the same.

• Trace a few transactions from inception to completion. (Examination in depth)
• E.g: Take few sales transaction, and check from the receipt of sales order to the payment of
receivable balance, every underlying document to ensure if it is properly recorded at every stage
and measured accurately taking into consideration all the incentives, discounts, if any. The
recognition shall be according to the revenue recognition policy of the entity.
• If the client is engaged in export sales, then compliance with AS 11 shall be ensured.
• Auditor must understand client’s operations and related GAAP issues e.g. point of sale revenue
recognition vs. percentage of completion, wherever applicable.
• Compare the rate of sales affected with related parties and review them for collectability, as
well as whether they were properly authorized and the value of such transactions were
reasonable and at arm’s length.

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