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Overstated Sales and Accounts Receivable |
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Objective |
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The objective of the audit is to whether there are overstated sales and accounts receivable. It is often seen that to meet market expectations the company overstates sales, by overstating the sales, the other impact will be over stated accounts receivable. |
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To see whether when money is received from debtor, the entry is made into the system and money receipt are issued or not. |
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Control |
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There should be proper control to check whether sales are overstated or not:- |
| i |
There should be proper invoicing for each sales that takes place, the sales should be only against the sales order. |
| ii |
It has to be seen whether the ownership of goods as been transferred or not, only after the ownership of goods has been transferred, the same should be recognized as sales, by looking at the sales order, one can understand, as to when the ownership of good will be transferred. |
| iii |
It has to be checked, as the sales entry are made, a corresponding account receivable entries are also made. |
| iv |
It has to be checked, as invoices are made only against sales order, and without sales order invoicing are not done, and against one sales order, multiple sales invoices are not allowed. |
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The stock register should be updated against each sales and invoice number be made , and goods outward receipt should be attached with the invoice. |
| vi |
whenever the money is received from debtors, money receipt are issued or not |
| vii |
whether the company allows receipt of cash from debtors, if yes than entry are made in cash book or not. |
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Missing controls |
| i |
The company might allow, invoicing without having the sales order, so in that case, there are chances where bogus sales invoices are raised, which will overstate the sales |
| ii |
The company does have control over the stock register and there are no tagging of good outward receipt, which will help in overstating the sales. |
| iii |
The individual debtors balance should be reconciled, with the ledger of that debtor with their books of accounts, to see whether the balances are matching, which will ensure that the receivables are not overstated |
| iv |
The company is receiving cash from debtors, but no entry are made in cash book and so the receivables are overstated. |
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Test of controls |
| i |
The auditor should check whether the system allows the company to raise an invoice without having a sales order, and it allows, it shows there are lack of internal control. |
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Check whether the goods outward receipt note are there with each sale invoice or not and entry are made in the stock register or not. |
| iii |
Is there any procedure to ensure, that the ledger in the books of the company, and that from the debtors are reconciled on periodic basis or not. |
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Audit of balance |
| i |
The audit should ensure that there are proper controls in place, to check the invoicing , so that no false invoicing are done. |
| ii |
The account receivables should be checked to see, whether there are any debtors from which the money has not received from a very long time, if yes, that it can be a case of false receivables. |
| iii |
Check whether the money from debtors are received on bill to bill, if payment are not received against any bill, it might be case of bogus sales invoice. |
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Discovery summary |
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By doing the procedures mentioned, it will be ascertained that there are no bogus sales recorded in the books of accounts, there are back up documents for each sales invoice with sales order and goods outward receipt note. It will also ensure that sales are only recorded when the ownership for goods has been transferred. If there are any lapses, in this, suspicion will arise that there might be case of overstatement of sales, by bogus sales invoice. |
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By checking that the receivables are raised against each sales invoice, and proper entry are done , when money are received and checking as to whether there bill to bill payment or not, and money receipt are issued. And by cross checking the ledger balance in our books, with the ledger balance with that of debtors, will ensure that the sales are genuine and all money received has been recorded, if there are any mismatch in these, it will arise suspicion and needs to be checked in detail to ascertain the reason for mismatch. |
