CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceMedium
An auditor is performing substantive analytical procedures on a client's revenue accounts. Which of the following procedures would be most effective in detecting unrecorded revenue?
- AVouching sales transactions from the general ledger to shipping documents.
- BComparing current year's sales volume in units to prior year's sales volume and investigating significant fluctuations.
- CComparing recorded sales prices to an approved price list.
- DAnalyzing the relationship between sales revenue and shipping costs, and investigating unexpected variances.
Show answer & explanationAnswer & explanation
Correct answer: D. Analyzing the relationship between sales revenue and shipping costs, and investigating unexpected variances.
Unrecorded revenue would likely lead to lower-than-expected shipping costs relative to recorded sales. Analyzing this relationship and investigating unexpected variances could reveal omitted sales.
Why the other options are wrong
- A. Vouching from ledger to shipping documents tests existence/occurrence of recorded sales, not completeness (unrecorded sales).
- B. While useful for overall reasonableness, it's less direct for detecting specific unrecorded revenue than a driver-based analytical procedure.
- C. This tests the accuracy/valuation of recorded sales, not unrecorded sales.
Analytical Procedures for Completeness
Analytical procedures used to identify potential omissions or understatements in financial statement balances, often by comparing relationships between financial and non-financial data.
- Focus on detecting understatement (completeness assertion).
- Involve comparing recorded amounts to expected values or related accounts.
- Example: Comparing recorded sales to production data or shipping volumes.
Memory trick: PACT: Predict, Act, Compare, Trace.