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Dear tutor,
I have been working on the procedures on receivables, and I can’t really understand below this one:
”Review a sample of post year-end credit notes to identify any that relate to pre-year-end transactions to verify that they have not been included in receivables. ”
Above the quote’s reference is ACCA Answers from June 2018.
What I don’t understand is, why post year-end credit notes cannot be related to the transactions happened pre year end? As I understand, there may be some delay between suppliers issue credit notes and the timing that transactions really happened.
Thank you very much in advance for your help. Please let me know if you think I didn’t express myself well.
Yichen : )
It’s related to “cut-off” – ensuring that transactions are properly recorded in the periods to which they relate. It’s best illustrated by just thinking about what is happening. Suppose X Co has y/e 31 December 20X0.
In December it raised an invoice for $50k – Dr Receivable/Cr Revenue
In January it raises a credit note $5k – Dr Revenue/Cr Receivable
If you don’t offset the credit note against the invoice as at 31/12/X0, both receivable and revenue will be overstated by $5k.
ALSO consider, the reason for the credit note may or may not be relevant to inventory as at 31/12/X0. For example:
1. customer was overcharged due to a pricing error or omitting to give the customer an agreed discount – has no effect on inventory;
2. customer returned goods (for some reason):
a. if returned before the y/e, they should have been included in the y/e count so no adjustment needed.
b. if returned after the y/e, they should be included in the y/e inventory valuation (at the lower of cost and NRV).Although the auditor is not looking specifically for fraud, you should be able to see that raising “fictitious” invoices before the y/e and reversing them after the y/e could artificially inflate revenue. So the review of post-y/e credit notes is an important audit procedure in testing the occurrence of sales.
Thank you so much Kim. Now it all makes sense to me. You definitely saved my Easter Holiday, I can finally have a good sleep now!
Have a good Easter!
Yichen 🙂
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