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Practical Guidance No.8 (Issued - December 2010) Topic: Revenue and Purchases Cut-off on Sale of Goods Introduction
1. Financial Reporting Standard (“FRS”) 18 “ Revenue” states that for sale of goods, one o criteria to recognise revenue is when the entity has transferred to the buyer the significant and rewards associated with ownership of the goods (FRS 18, paragraph 14a). There cou instances where companies recognise revenue and purchases based on the date of invoices or supplier invoices respectively without taking into consideration the requiremen FRS 18 as mentioned above and this could potentially lead to improper cut-off of revenue purchases at year-end, resulting in misstatements of the financial statements. Hence, p revenue and purchases cut-off tests at year-end are critical in addressing the cut-off asse for sales and purchases.
2. The aim of this Practical Guidance is to provide auditors with some guidance when perfor sales and purchases cut-off procedures for companies engaged in local and/or overseas tr sales of goods. Guiding Principle
3. FRS 18 states that revenue from the sale of goods should be recognised when the entity transferred to the buyer the significant risks and rewards of ownership of the goods (FR paragraph 14a).
4. FRS 18 also further explains that the assessment of when an entity has transferred significant risks and rewards of ownership to the buyer requires an examination o circumstances of the transaction. In most cases, the transfer of the risks and rewar Sign up to vote on this title ownership coincides with the transfer of the legal title or the passing of possession to the b Useful the Not This is the case for most retail sales. In other cases, transfer ofuseful risks and reward ownership occurs at a different time from the transfer of legal title or the passing of posse (FRS 18, paragraph 15).
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6. As part of the sales cut-off tests, auditors should also examine the credit notes issued year-end and determine whether any sales made before year end are returned to the com subsequent to year end. As this may have significant impact on the sales recognised b year end. (a) Local trading sales
7. As part of the audit procedures, auditors will ordinarily select samples to test cut-off before after year end.
8. For local sales, auditors will need to obtain acknowledged delivery orders or sales inv issued by the company and check that the dates of acknowledgement by the custo indicated on the delivery orders or sales invoices, are in the same accounting period in w the sales are recognised. As mentioned in Practical Guidance No. 5 “Occurrence of Rev from Sales of Goods”, auditors would also need to be mindful of whether there are any agreements entered or clauses in the sales agreements or invoices which may impac appropriate point of revenue recognition.
9. However, there could be situations where the customers do not sign as acknowledgeme indicate the date of receipt of goods on the delivery orders or sales invoices. Such del orders and sales invoices may not be considered as appropriate and reliable source docum You're Reading a Preview for the purpose of testing sales cut-off. In the absence of reliable source documents, aud could try to obtain alternative evidence audit procedures performed. For exam Unlock fullfrom accessother with a free trial. the auditors can understand and test the key controls for the inventories cycle to establis card records reliability of the Company’s stockDownload . With With Free reliable Trial stock card records, the sales off can be performed by obtaining the stocks cards of the samples selected and check the that the goods are despatched from the warehouse to determine if they should be accou for before or after the year end. The auditors could also perform a detailed analytical revie identify potential cut-off errors (refer to paragraph 16 below for more details). Sign up to vote on this title
(b) Overseas trading sales
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10. As mentioned in Practical Guidance No. 5 “Occurrence of Revenue f rom Sales of Go
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11. There could be instances where goods are directly shipped from the company’s suppliers t customers or where goods are purchased only when there is a sales order (i.e. back-to-b For these transactions, the auditors should verify the sales/purchases cut-off samples sele to the shipping documents and match with the corresponding purchases/sales to b address the cut-off assertion. Purchases cut-off procedures (a) Local trading purchases
12. For local purchases, the auditors will need to obtain delivery orders of suppliers and check the dates of receipt of the goods by the company are in the same accounting period in w the purchases are recognised.
13. Similar to sales, if there is no acknowledgement or there is no indication of the date of re of goods on the delivery orders, the auditors could try to obtain alternative evidence from audit procedures performed such as obtaining the stocks cards of the samples selected checking whether the goods are received before or after the year end after understanding testing the key controls for the inventories cycle to establish that the stock card record reliable. (b) Overseas trading purchases
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14. For overseas purchases where incoterms are used, similar to overseas trading sales, aud would need to consider the incoterms to determine point where the risks and rewar Download With Freethe Trial the ownership are transferred and obtain the relevant shipping documents and check tha dates of the shipping documents are in the same accounting period in which the purchase recognised. The auditors would also need to be mindful of whether there are any agreements entered or clauses in the sales agreements or invoices which may impac Sign up to vote on this title appropriate point of recognition of the purchases.
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15. When performing cut-off tests for overseas purchases, auditors should be mindful tha company should not recognise purchases based on the dates of the letters of credit or
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when the auditor considers a misstatement or deviation discovered in a sample to b anomaly, the auditor shall obtain a high degree of certainty that such misstatement or devi is not representative of the population. The auditor shall obtain this degree of certaint performing additional audit procedures to obtain sufficient appropriate audit evidence tha misstatement or deviation does not affect the remainder of the population (paragraph 1 analyzing the deviations and misstatements identified, the auditor may observe that many a common feature, for example, type of transaction, location, product line or period of tim such circumstances, the auditor may decide to identify all items in the population that po the common feature, and extend audit procedures to those items. In addition, such devia or misstatements may be intentional, and may indicate the possibility of fraud (paragraph This means that if discrepancies are noted in cut-off tests, the auditors will need to con whether there is a need to increase the number of samples tested or extend the period cov before arriving at a conclusion on the impact of the discrepancies on the financial statemen a whole. Overall review at the end of the audit
17. Clarified SSA 520 “Analytical Procedures” , paragraph 6 states that the auditor should design perform analytical procedures near the end of the audit to assist the auditor when formin overall conclusion as to whether the financial statements as a whole are consistent with auditor's understanding of the entity. Such analytical procedures are useful tools if the You're Reading a Preview robustly performed at the disaggregated level of sales and purchases as they can help auditors to identify potential cut-off errors. Unlock full access with a free trial. Conclusion
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18. Auditors need to bear in mind the importance of assessing when the significant risks rewards of ownership of the goods are transferred when performing cut-off tests and requirements of Clarified SSA 530 “Audit Sampling” when cut-off errors are noted to pro Sign up to vote on this title address the cut-off of revenue and purchases at year-end.
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