Auditors apply their knowledge of the revenue and collection cycle to design audit procedures that address identified risks and evaluate the findings from their tests. This process involves selecting the appropriate mix of tests of controls and substantive procedures.
The audit process includes the following steps:
Using the audit risk model, auditors determine inherent and control risks.
Substantive procedures are tailored based on assessed risks.
Dual-direction testing:
Occurrence direction: Vouch recorded sales to supporting documents.
Completeness direction: Trace shipments to sales journal entries.
Automated tools, such as exception testing, can be used to test controls across entire datasets.
Analytical procedures: Trend analysis of sales and receivables.
Tests of details:
Revenue testing: Matching invoices with purchase orders and shipping documents.
Accounts receivable testing: Confirming balances with customers.
If misstatements are found, auditors assess materiality and investigate the cause.
Misstatements may require adjustments, expanded testing, or changes in audit strategy.
Audit team assessed risks: Inherent risk was low; control risk was low.
Control tests were successful: Strong internal controls reduced detection risk.
Final audit approach: Relied on analytical procedures and selective detailed testing​.
Effective audit procedures ensure accurate revenue recognition and receivable valuation.
Exception testing and data analytics enhance testing efficiency.
Findings must be analyzed, and any material misstatements must be addressed to ensure fair financial reporting​.