How to verify that revenue or sales transactions occurred or exist?
The main risk related to revenue is that the company overstates revenue. Testing for the existence/occurrence of revenue transactions is critical. For most companies, the best test will be to vouch amounts from the general ledger / sales journal back to source documents (invoices, shipping documentation, etc.).
Basically, you would select revenue transactions from the sales journal (which reconciles with revenue in the financial statements) and obtain the invoice and shipping documentation to prove that the good were sent to the customer. The audit team should also verify that the customer paid for the goods.
You might also be interested in...
How to test the accuracy assertion for revenue or sales transactions?
The accuracy assertion addresses whether the transaction was recorded at the correct amount. The most common way to test accuracy for revenue or sales transaction is to obtain the invoice that was sent to the customer and compare or agree the two pieces of information.
How to test the cutoff assertion for revenue?
The primary concern for cutoff with revenue is that revenue transactions are recorded in the proper period. The audit team should typically focus on the few days before and after the cut-off date (i.e. December 31st for a calendar year reporting period). As the audit team, you would request a detailed listing of all transactions […]
How to test the occurrence assertion for revenue?
The primary concern regarding revenue is that the company is overstating revenue because why would a company understate revenue? Therefore, the audit team needs to test the occurrence/existence assertion to assess whether all of the sales recorded actually exist. The types of tests that can be performed will vary by company, but the audit team […]