Auditing Cash Sales – Risk, Assertions, And Procedures

Despite the ongoing trend to move businesses online and to convert transactions into electronic forms, there are still a lot of entities out there that are operating mostly in cash, meaning to say, Cash Sales are still a major part of of their businesses.

These entities are usually retail businesses that are operating on a shopfront, and cash is the main form of payment that they accept for the goods and services they provide. To audit their Cash Sales, there a few factors an auditor should look at.

Risks:

Before the auditor can decide what procedures to perform, the risks associated with auditing Cash Sales should first be identified:

• Risk of Material Misstatement: There are various Risks of Material Misstatement regarding auditing Cash Sales. As the entity operates in a cash-intensive industry, material misstatements can arise from Cash Sales made not being recorded, Cash Sales being recorded wrongly, or misappropriation of the cash receipts. There is also a risk that the Cash Sales may be manipulated by management to influence the profit figure if their performance evaluation and bonus payments rely heavily on the business performance.

• Control Risk: Some of the Control Risks related to Cash Sales include lack of control on the safeguarding of cash receipts, collections not being recorded in the correct accounting period, and the lack of segregation of duties between the person who handles the cash and the person who reports the cash sales. Poor controls can primarily affect the Cash Sales reported and may even cause the business to lose its money if theft happens.

• Detection Risk: Detection Risk is the risk that an auditor cannot detect the material misstatements in the reported amounts of revenue and cash and bank balances arising from wrongly recording Cash Sales.

The audit risk for Cash Sales is generally high due to its nature.

Assertions:

• Occurrence: This assertion tests that the Cash Sales reported by the entity occurred and are not made up.
• Completeness: All Cash Sales that the entity made during the accounting period are recorded and reported.
• Measurement: The Cash Sales reported are accurately measured without any material misstatement, especially misstatements that might change the bottom line of the financial statements.
• Cut-off: This assertion helps make sure that Cash Sales around the end of the accounting period are recorded in the correct accounting period.
• Presentation and Disclosure: Cash sales are generally presented in total with other types of sales under revenue and follow the relevant accounting standards. Relevant disclosures should also be made in the notes to the financial statements where applicable.

Procedures:

Audit Procedures for testing Cash Sales include Test of Controls and Substantive Tests.

Test of Controls:

• Recording of Cash Receipts: This control ensures all cash received by the entity on its sales has been recorded through the issuance of invoices and official receipts. Auditors can perform a test by observing the procedures at the entity’s business premise.

• Matching Cash Receipts to Sales: This control ensures that the entity has a process to check all cash receipts to its sales amount to ensure the collections from customers are correct. It also helps to ascertain that the Cash Sales are reported correctly as sales in the financial statements instead of other income. To test this control, auditors will need to obtain the bank statements and official receipts issued and match them to the entity’s reported sales figure.

• Segregation of Duties: This control is crucial here as in any other process. Under this control, auditors will have to check if the person handling the cash receipts is different from that who reports the Cash Sales. This will lower the risks of fraud and misappropriation of cash.

Substantive Audit Procedures for Cash Sales:

Substantive Audit Procedures for Cash Sales are primarily similar to that of revenue. They consist of the following components:

1) Substantive Analytical Procedures:

Substantive Analytical Procedures require the auditors to focus their attention on any changes or lack of changes in the entity’s financial performance. We will first have to set some expectations based on our understanding of the business and discuss with the management to obtain any information that may be relevant to the entity’s sales. This will allow us, as an auditor, to detect potential areas with a higher risk of material misstatements.

For example, when auditing a retail business selling fast food operating in cash, we may expect to see the entity generating higher Cash Sales during school holidays and when a new food menu is released.

If the actual reported Cash Sales figures in these months are lower than expected, there might be a risk of material misstatements, which will require the auditor to investigate further.

2) Test of Details for Cash Sales:

To test details for Cash Sales, audit procedures are designed around assertions similar to that of revenue. Examples and description of the test of more information are given in the table below: