Question

An auditor client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past 5 years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?
A. The auditor should perform analytical procedures at an interim date and discuss any changes in the level of sales with senior management
B. The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.
C. The auditor should perform tests of controls at an interim date to obtain audit evidence about the operational effectiveness of internal controls over sales.
D. The auditor should review period-end compensation to determine if bonuses were paid to meet earnings goals.

Answer 1

Answer:

B.

Explanation:

Based on the information given that a large portion of sales occur at the last month of the year, a key audit concern or risk would be the revenue or sales cutoff. This concern is on the recognition of revenue in the appropriate period as most of the sales are recorded in the last month of the year. The risk exist that such sales are recognized to meet up with the yearly sales target of the organization. The performance of analytical procedure would not be effective as the results (trend) over the past 5 years have been similar. A test of internal controls at an interim date may also not be effective as there may be multiple level connivance to ensure that sales target are met. Also, the review of period end compensation of bonuses paid may not address the identified risk as such option B which deals with revenue recognition is the most appropriate option.