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

Larry Perry
CPA Firm Support Services, LLC
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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       Complete/Occur/Value/Exist
1. Completing Client Acceptance and Continuance Form                                                   x
2. Reading the general ledger.                              X    
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.

About Larry Perry CPA

About Larry Perry CPA

Larry Perry, CPA, is managing member of CPA Firm Support Services LLC.


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