## Audit of Sales: Verifying Occurrence and Absence of Overstatement

### Why Sales Are High-Risk

Management may be incentivised to overstate sales (bonuses, debt covenants, investor pressure). Audit focus: Occurrence (real sales) and Completeness (no fictitious entries).

### Audit Procedures

#### Completeness and Occurrence

Procedure	Risk Addressed
Check for duplicate invoices in the sales journal	Same sale recorded twice
Verify cancelled invoices are not recorded	Ghost revenue
Trace sample invoices to sales journal entries	Recording accuracy
Obtain customer confirmations (external confirmation)	Fictitious customers/sales
Check for fictitious customer master records	Fraudulent sales
Verify year-end shipments have customer consent/agreement	Premature revenue recognition

#### Recognition and Classification

Procedure	Risk Addressed
Check for unearned revenue recorded as earned	Timing misstatement
Assess collectability doubts	Overstatement of net realisable value
Verify customer obligations are not contingent on side deals	Contingent sales

#### Analytical Procedures

Procedure	Signal
Review sequence of sales invoices	Missing/duplicate numbers
Review journal entries for unusual transactions	Manual entries, round numbers
Calculate sales return-to-sales ratio vs prior year	Spike may indicate reversed fictitious sales

### Assertion Mapping

Occurrence: Customer confirmations, shipment documentation, duplicate checks
Completeness: Sequence checks, cut-off procedures
Accuracy: Invoice-to-journal tracing
Cut-off: Year-end shipment review

Worked example

### Example 1

Manufacturing Entity Sales Audit:

Scenario: Auditor must confirm that recorded sales represent goods actually delivered and revenue is not overstated.

Step 1 – Duplicate check: Run a query on the sales ledger for invoices with identical amounts, dates, and customers.

Step 2 – Sequence review: Verify invoice number sequence; investigate gaps (could indicate cancelled invoices not voided) and duplicates.

Step 3 – Customer confirmation: Select a sample of large debtors and send external confirmation requests (positive form preferred).

Step 4 – Year-end cut-off: For last 5 days of year, obtain despatch records and confirm goods physically left premises before year-end.

Step 5 – Sales returns ratio: Compare current year's returns/sales ratio with prior year. A significant fall in returns after year-end could indicate returned goods not yet reversed.

Step 6 – Journal entry review: Flag manual journal entries to sales accounts, especially those without supporting invoices or made on unusual dates.

⚠️ Common exam mistakes

Focusing only on understatement of sales (completeness) and ignoring overstatement (occurrence)
Not performing external customer confirmations — this is the strongest evidence for occurrence
Missing year-end cut-off — checking whether shipments near year-end had genuine customer agreement
Overlooking sales return analysis as an indicator of reversed fictitious sales
Not checking whether customer obligations are contingent on financing or resale arrangements that disqualify revenue recognition

Reference:

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Audit of Sales – Occurrence and Completeness Assertions

Worked example

⚠️ Common exam mistakes