## Audit of Sales Revenue – Occurrence, Completeness & Measurement
### Three Critical Assertions for Revenue
| Assertion | Risk | What Auditor is Checking |
|---|---|---|
| Occurrence | Fake / inflated sales recorded | Are all recorded sales real and earned? |
| Completeness | Genuine sales omitted | Are all earned sales actually recorded? |
| Measurement | Wrong amount or wrong period | Is revenue recognised at the correct amount and at the right time? |
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## Part A: Occurrence – No Fake Sales Booked
Goal: Ensure revenue is not overstated.
### Specific Procedures:
a) Duplicate Invoice Check
- Check whether any single invoice has been recorded twice.
- Check whether any cancelled invoice could also have been recorded.
b) Invoice Vouching with Journal Entries
- Test a sample of invoices by tracing to the relevant journal entry to verify the entry is genuine and complete.
c) Customer Confirmations
- Obtain direct confirmation from a selection of customers to verify that the sale and the outstanding balance are acknowledged by them.
d) Fictitious Customer Check
- Verify whether any fictitious customers exist in the records.
- Check whether any sales have been made to non-existent parties.
e) Collectability Assessment
- Check whether there is any substantial uncertainty about collectability of the recorded revenue.
- Revenue should not be recognised if it is unlikely to be collected.
f) Unauthorised Shipments at Year-End
- Check whether any shipment was done at year-end without the customer's consent and recorded as a sale.
- Such shipments result in unearned revenue being recorded as earned — a classic manipulation.
g) Revenue Sequence Check
- Review the sequence of sale invoices — gaps in sequence may indicate unrecorded sales or cancelled invoices.
h) Journal Entry Review
- Review journal entries related to revenue, especially unusual transactions — manual journal entries to revenue accounts are a key fraud indicator.
i) Sales Return Ratio Analysis
- Calculate: Sales Return ÷ Sales → compare with prior year.
- A lower ratio in the current year despite similar sales volumes may suggest sales returns are being suppressed.
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## Part B: Completeness – Cut-Off Procedures
Goal: Ensure all genuine sales are recorded.
- Perform cut-off procedures (see separate topic on Receivables Cut-off).
- Identify whether revenue is recognised on invoice basis vs. risk & reward basis — under AS 9/Ind AS 115, risk & reward (or performance obligation) basis is correct.
- Verify credit notes issued after the accounting period-end — these may be used to reverse fictitious sales booked before year-end.
- Trace entries from shipping documents to the Sales Journal — ensure no dispatched goods are missing from sales records.
- Perform GST Return Reasonableness Test:
- Formula: Output GST = Sales × GST Rate %
- Compare the computed GST liability with the GST return filed.
- A significant difference suggests unrecorded sales or incorrect recording.
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## Part C: Measurement – Correct Amount & Period [May 2025 Exam Focus]
Goal: Revenue is recognised at the correct value and in the correct period.
Transaction Tracing:
- Select a few transactions and trace them from inception to completion:
- Receipt of Sales Order → Dispatch of Goods → Invoice Raised → Payment Received
- At each stage, verify that revenue recognition aligns with company policy.
Revenue Recognition Policy:
- Verify revenue is recognised as per AS 9 (or Ind AS 115 for applicable entities).
- For export transactions, verify compliance with AS 11 (Effects of Changes in Foreign Exchange Rates) — export revenue must be recorded at the correct exchange rate.
Client Operations Understanding:
- Auditor must understand client's operations and any GAAP issues that may affect measurement.
Related Party Sales:
- For sales to related parties:
- Compare the rate charged versus the rate charged to unrelated parties.
- Review collectability of the related party receivable.
- Verify the transaction is properly authorised.
- Confirm the transaction is at arm's length.