External confirmations/circularisation
audit evidence obtained as a direct written response to the auditor from a third party (the confirming party) in paper form, or by electronic or other medium. It is reliable since it is obtained from an independent source and is in documentary form
Confirmation must be written on client’s headed paper and signed by them with the current statement attached. It shall request that the reply be sent directly to the auditor
True
Types of confirmations
Positive - the confirming party responds directly to the auditor indicating whether they agree with the information in the request or provides the requested information
Negative - the confirming party responds directly to the auditor only if they disagree with the information in the request
The reply from the confirmations must be sent directly to the auditor
True
Exception
a response that indicates a difference between information requested to be contained in the entity’s records and information provided by the confirming party. Exception responses disagree with the balance stated (positive and negative) resulting in an exception
What are exceptions indicative of ?
potential misstatements in the FS and must be investigated by the auditor
deficiency in internal control
not all exceptions represent misstatements eg. timing or clerical errors
auditor must evaluate whether misstatements identified are indicative of fraud
When no response is received, auditor shall perform alternative audit procedures to obtain relevant and reliable audit evidence like what?
Review cash after year end
Discuss with the responsible company official
Verify o/s items to back up documentation. eg. invoices, GDN’s customer orders
What audit evidence are auditors seeking to obtain for revenue?
revenue exists and pertains to the entity (occurrence), is accurately recorded (accuracy), is recorded in the correct period (cut off)
External confirmations are primarily for testing the client’s entitlement to receive debt and not the customer’s ability to pay
True
Between positive and negative confirmations, which one is more preferable?
Positive confirmations
Because negative confirmation is less persuasive than positive confirmation, it cannot be used as the sole audit procedure to test receivables unless all of what is present?
low exception rate is expected
risk of material misstatement is assessed to low
populations consists of a large number of small, homogenous account balances
auditor has obtained sufficient audit evidence on the effectiveness of controls
auditor is not aware of conditions or circumstances that would cause customers to disregard the requests
Non response
failure of the confirming party to respond or fully respond to a positive confirmation request or a confirmation request returned undelivered
Steps to recognize revenue according to IFRS 15 Revenue from Contracts with Customers
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognise revenue when or as the entity satisfies a performance obligation
Revenue key assertions
Occurrence (the revenue exists and pertains to the entity)
Recorded completely and accurately
Recorded in the correct period (cut off)
Analytical procedures to consider for revenue
level of revenue over the year
effect on revenue value of changes in products or prices
effect on revenue value of changes in quantities sold
level of goods returned, allowances and discounts
efficiency of labour as expressed in revenue or profit before tax per employee
reasons for changes in GP margin
Remember in manufacturing/wholesale industries the process is
customer calls to place an order (sales order is created)
goods are delivered to customer so goods delivered not is produced. Revenue is recorded at this time
Invoice is created for payment
Revenue is recorded after the goods have been delivered and control has passed to the customer. That often, but not always, includes the customer signing for the goods.
True
What are some methods clients use to overstate receivables?
- record fictitious sales (fake vendors, record sales that never occurred)
- channel stuffing - sending excessive goods to distributors and recognizing them as sales even if they will be returned. Audit clue: large credit notes, many goods returned after period end
- Cut off manipulation - recording sales that pertain to after period end in the current period. audit clue sales recorded in december but goods shipped in january
- understating bad debt provision
- recording customer deposits and prepayments as receivables
- Not writing off uncollectible amounts
Difference between positive and negative confirmations
Positive confirmation requires a response either way; negative confirmation only requires a response if the info is wrong.
A common control over the revenue system is what
Having numerically sequenced invoices which are matched to shipping documentation or goods delivered notes
