Efficient Tests of Balances Series--No. 43: Matching Procedures with Revenues Assertions | AccountingWEB

Efficient Tests of Balances Series--No. 43: Matching Procedures with Revenues Assertions

Recognizing that risk assessment procedures and analytical procedures are being performed for revenues, and that cash and accounts receivable tests of balances contribute evidence to evaluating financial statement assertions for revenues, the question at this point is “What additional tests of balances are necessary for revenues?”  The following table presents an analysis of evidence collected in carrying out the audit strategy.

In this illustration, the planned audit strategy is based on moderate risk of material misstatement: 1) high reliance on risk assessment procedures, 2) high reliance on analytical procedures and 3) low reliance on tests of balances.  Here’s how the evidence collected under this strategy will impact the financial statement assertions (x=a small contribution;X=a large contribution):




Risk Assessment Procedures


1. Completing Client Acceptance and Continuance Form



2. Reading the general ledger.


3. Internal control flowchart for sales and        collections cycle.


              X            X        X       X

4. Systems walk-through procedure with 10 sales transactions selected from shipping reports without bias.



              X            X        X       X

Analytical Procedures


1. Number of days sales in accounts receivable.


              x             x         x        x

2. Gross margin by product line.

              x             x         x        x

3. Inventory turnover by product line.

              x             x         x        x

4. Dollar balances of sales by product line trend comparison for three years.


              x             x         x        x


After assessing the contributions of substantive evidence from the risk assessment and analytical procedures, our question at this point is “What other substantive tests of sales revenues are necessary?”  Assuming no significant misstatements were found as a result of the procedures above, at the moderate risk level the answer to the question is that only sales cutoff tests and confirmations of receivables balances at the beginning and the end of the year will be necessary.

If the auditor can perform a predictive analytical procedure for sales (such as the number of units sold times sale price) for comparison to recorded sales and results are acceptable, the substantive evidence for will likely be more than sufficient, even for high risk!  In other words, no other tests of balances for the sales classification would ordinarily be necessary.

When significant misstatements are found in the risk assessment and/or analytical procedures, more detailed tests of balances procedures will ordinarily be necessary.  For the completeness assertion as an example, the auditor may need to select a sample of 25-40 shipping reports and trace them to their entry in the sales journal.  It also may be necessary to compare sales by month with preceding years to identify any material variations.  If material variations are identified, performing detailed support tests for a sample of recorded sales invoices may be necessary to evaluate the existence assertion.

Live and on-demand presentations of my Basic Staff Training Series webcast, Auditing Revenues, can be obtained by clicking on the applicable box on the left side of my home page.

This blog

by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.


Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.


Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.


Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".


William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.


Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.


Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.


Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.


The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.


FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.


Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.


Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.


AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.