Revenue and receivables - Occurrence, cut-off, and completen...

Learning Outcomes

After reading this article, you will be able to define and distinguish key financial statement assertions relating to revenue and receivables—specifically, occurrence, cut-off, and completeness. You will learn how these assertions apply to sales transactions, identify common risks of material misstatement, and describe appropriate audit procedures to obtain sufficient and appropriate evidence. You will also be able to construct and evaluate audit responses to specific risk scenarios for these areas.

ACCA Audit and Assurance (AA) Syllabus

For ACCA Audit and Assurance (AA), you are required to understand key assertions relevant to revenue and receivables, common risks, and the design of substantive and control procedures to test them. This article targets:

• The main audit assertions for transactions and balances: occurrence, completeness, and cut-off (ISA 315).
• Audit risks specific to revenue recognition and receivables (risk of overstatement and understatement).
• Substantive and controls testing procedures for revenue and receivables, including directional testing.
• How to perform audit procedures designed to detect errors in occurrence, completeness, and cut-off.
• The use of analytical procedures and external confirmations in obtaining audit evidence.
• Typical control deficiencies and direct controls in sales and receivables cycles.
• Applying these concepts to practical scenarios, as assessed in ACCA AA.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which assertion is being tested when an auditor traces a sample of sales invoices from the sales ledger to supporting dispatch documentation?
2. What procedure should an auditor perform to test the cut-off assertion for revenue at year-end?
3. True or false? Inspecting a sample of cash received after year-end can provide evidence for the valuation of receivables but not for the occurrence of revenue.
4. State one risk and one substantive procedure related to the completeness of recorded sales in the financial statements.

Introduction

Revenue is frequently a material and high-risk area in audit due to presumed risks of manipulation. Receivables are also subject to risk, primarily in valuation and existence, but completeness and occurrence matter for both balances and sales transactions. The auditor must obtain sufficient and appropriate evidence that all revenue recognised in the period actually occurred, is recognised in the correct period, and that no legitimate sales are omitted. Likewise, receivables should represent real debts owed to the entity at period-end and be complete.

Key Term: Occurrence (assertion)
The assertion that recorded transactions and events actually took place and pertain to the entity.

Key Term: Completeness (assertion)
The assertion that all transactions and related events that should have been recorded have been recorded.

Key Term: Cut-off (assertion)
The assertion that transactions and events are recorded in the correct accounting period.

Revenue and Receivables: Assertions and Audit Risks

Audit work in this area focuses on three key assertions:

• Occurrence: Ensuring that all sales recorded represent goods or services actually provided during the period.
• Completeness: Ensuring that all sales transactions that should have been recorded have in fact been entered into the books.
• Cut-off: Confirming that transactions at the period end are included in the correct accounting period and not misstated through early or late recognition.

Errors or fraud can result in revenue being overstated (e.g., fictitious sales) or understated (e.g., omitting real sales), and revenue being recorded in the wrong period due to cut-off issues.

Key Term: Directional testing
The approach of selecting source documents outside the accounting system to test for completeness, or selecting from the accounting records to test for occurrence.

Typical Risks in Revenue and Receivables

• Recording fictitious sales to inflate reported revenue (occurrence risk).
• Omitting valid sales transactions (completeness risk), especially cash or unbilled sales.
• Recording sales in incorrect periods for profit manipulation (cut-off risk).
• Receivables that do not exist (overstatement of assets).
• Uncollected debts (valuation, which is addressed in detail elsewhere).

Worked Example 1.1

A sporting goods company records sales revenue when goods are shipped. Near year-end, management instructs staff to dispatch several large orders on 29 December, but delays invoicing and recording the sales until 3 January after year-end.

Question: Which assertion has been breached, and what audit procedure addresses this?

Answer:
The cut-off assertion is at risk. The auditor should inspect a sample of goods dispatch notes (GDNs) and invoices both before and after year-end to ensure sales have been recorded in the correct period.

Audit Procedures for Revenue and Receivables

Occurrence

• Select a sample of sales entries from the sales ledger.
• Trace each to the related sales invoice, then to delivery documentation (goods dispatch notes, shipping records) and supporting customer order.
• Check that customer has accepted delivery and that the transaction pertains to the period.

Key Term: External confirmation
Audit evidence obtained as a direct written response from a third party to the auditor.

Completeness

• Start from source documents such as GDNs or customer orders, select a sample, and trace each through to the sales invoice and then into the sales ledger.
• Review the sequence of pre-numbered documents (orders, dispatch notes, invoices) to identify missing entries.
• Reconcile recorded revenue with other relevant data, such as stock movements or cash receipts, to detect unrecorded sales.

Cut-off

• Obtain and inspect the last numbers of GDNs and sales invoices issued before and after the period-end.
• Trace these through to the ledger entries and ensure transactions have been recorded in the correct accounting period.
• Inspect returns and credit notes after period-end and confirm if any relate to the prior period.

Worked Example 1.2

During the audit of a building supplies company with a 31 December year-end, the auditor notes that the last dispatch note issued before year-end is GDN #1050, but sales invoices recorded show entries up to #1060 dated 31 December. Some corresponding dispatch notes for invoices #1051–1060 are dated 2–5 January.

Question: What procedures should the auditor perform, and which assertion is at risk?

Answer:
There is a risk that revenue is overstated (occurrence and cut-off assertions). The auditor should verify that only those goods actually dispatched by 31 December are recorded as year-end sales, and that any invoices relating to dispatches after year-end are recognised in the correct period.

Audit Procedures for Receivables

Audit work in receivables often focuses on existence and valuation, but completeness and occurrence are also relevant:

• Compare the total of the receivables ledger to the general ledger control account and the statement of financial position.
• Perform debtor circularisation (external confirmation) for a sample of balances to confirm existence.
• Review credit notes and adjustments after period-end for evidence of fictitious or reversed sales.
• Analyse aged receivables: investigate large or long-outstanding balances.

Exam Warning

A common mistake is to perform inappropriate procedures for the wrong assertion (e.g., testing existence when the risk is completeness). Always tailor procedures to the specific assertion at risk and the scenario described.

Direct Controls and Deficiencies in Sales Processes

Auditors also evaluate internal controls to assess reliability:

Direct controls in the revenue and receivables cycle may include:

• Segregation of duties between order processing, dispatch, invoicing, and cash receipt.
• Sequential numbering and regular sequence checks of orders, dispatch notes, and invoices.
• Independent review of credit limits and authorisation of credit customers.
• Reconciliation of dispatch records with invoicing and accounting entries.

Typical control deficiencies may involve:

• No sequential numbering or review of documentation.
• Inadequate segregation of duties.
• Failure to reconcile sales records to stock movements or cash received.
• Incomplete recording of dispatched goods.

Worked Example 1.3

A furniture retailer only numbers sales invoices, not dispatch notes. Staff report frequent customer complaints about missed deliveries. No reconciliation is performed between items dispatched and sales invoices raised.

Question: Which assertions are at risk, and what audit controls are missing?

Answer:
Completeness and occurrence are at risk. The company should sequentially number and regularly check dispatch notes, and reconcile them to sales invoices to ensure all dispatches are recorded as sales and all sales are backed by actual dispatches.

Revision Tip

When planning substantive testing, always clarify the direction of your test: select from accounting records to test occurrence (overstatement), and from source documentation to test completeness (understatement).

Summary

Assertions of occurrence, completeness, and cut-off are critical in testing revenue and receivables. Auditors must design audit procedures that specifically address the identified risks and assertions. Both controls and substantive procedures, including tests of documentation, reconciliations, and timely review of source documents, enable detection of material misstatements in these key areas.

Key Point Checklist

This article has covered the following key knowledge points:

• Define and distinguish the occurrence, completeness, and cut-off assertions for revenue and receivables.
• Identify common risks of misstatement in the revenue and receivables cycle.
• Describe substantive and control-based audit procedures specific to each assertion.
• Apply directional testing when addressing completeness and occurrence assertions.
• Evaluate control deficiencies and design controls that address these key assertions.
• Use real-world scenarios to construct tailored audit responses.

Key Terms and Concepts

• Occurrence (assertion)
• Completeness (assertion)
• Cut-off (assertion)
• Directional testing
• External confirmation