Accounting•Chapter 6•5 min read•Updated September 24, 2026

Auditing — Auditing Specific Accounts: Revenue, Receivables, Inventory and Cash

O
OiyoContributor
6/8

This chapter applies the principles of the earlier chapters to actual accounts: revenue and receivables and inventory, which carry the greatest risk at most companies, and cash, where errors are rare but misappropriation is a risk. The key is which assertions are at risk in each account and which procedures respond to them.

1. Revenue and receivables

A. The risk in revenue recognition

KSA 240 requires the auditor to presume a fraud risk in revenue recognition. Fictitious sales, channel stuffing at period-end and side agreements concealing return rights are typical. The main risk is overstatement — occurrence and cut-off.

B. Cut-off testing

Shipping records and sales records for a few days either side of the period-end are compared. For a 31 December year-end, shipments from 26 December to 5 January are examined to confirm that sales recorded in December involved a transfer of control in December. If ₩300 million of sales recorded on 30 December has a shipping document dated 3 January, the ₩300 million (with the related cost of sales) must be moved to the following year.

C. External confirmation of receivables

The auditor sends balance confirmations directly to customers and receives them directly (KSA 505).

  • Positive confirmation: a reply is requested whether or not the balance is correct. It provides strong evidence.
  • Negative confirmation: a reply is requested only if the balance is wrong. Used only when risk is low and there are many small balances.

If there is no reply, alternative procedures check subsequent cash receipts, contracts and shipping documents. Confirmation requests must always be sent and received by the auditor directly.

Evaluating confirmation differences
Misstatement=Book balance−Confirmed balance−Explained differences (timing, etc.)\text{Misstatement} = \text{Book balance} - \text{Confirmed balance} - \text{Explained differences (timing, etc.)}
The customer replies ₩9 million against a book balance of ₩10 million. If the ₩1 million is for goods shipped on 31 December and received on 2 January — a timing difference correctly cut off — there is no misstatement.

D. Valuation

Whether the loss allowance is adequate is reviewed with the aging schedule, subsequent collections and the accuracy of past estimates (Principles of Accounting chapter 7).

2. Inventory

A. Attending the count

The key procedure for confirming inventory existence is the auditor’s attendance at the company’s period-end physical count (KSA 501). The auditor observes the count procedures and counts some items personally to compare with the company’s tally (test counts), checking in both directions: from count sheets to records (completeness) and from records to the physical items (existence). If the count date differs from the period-end, movements in between are reviewed to roll the balance forward or back.

B. Valuation

The net realizable value of inventory is reviewed by looking at post-period selling prices, lists of slow-moving items and signs of obsolescence, and the auditor checks that the basis for write-down allowances is applied consistently each year (Intermediate Accounting chapter 2).

Results of inventory test counts (units)
ItemCompany countAuditor's test countDifference
A-1001,2001,2000
B-220850820−30
C-3104004000

The 30-unit difference on B-220 (₩1.5 million at ₩50,000 each) must be recounted and explained by the company. If the error rate in the test counts is high, the auditor doubts the reliability of the whole count and extends the test counts.

3. Cash

Cash can be confirmed exactly but carries a risk of misappropriation. A bank confirmation is sent for every account to confirm balances, borrowings, pledged collateral and guarantees at once. The auditor recalculates the company’s bank reconciliations and checks that deposits in transit and outstanding cheques actually cleared after the period-end (Principles of Accounting chapter 7). To detect kiting — using transfers between accounts around the period-end to count the same money in two accounts at once — the schedule of interbank transfers is reviewed.

Check your understanding

AL’s year-end is 31 December. The auditor finds that (1) ₩500 million of sales recorded on 29 December has a shipping document dated 4 January of the following year, and (2) in the receivables confirmation, customer B replied with a balance ₩30 million lower than the books, saying “we remitted ₩30 million on 30 December”, while AL’s books record the receipt on 3 January. Is each a misstatement?

(1) Control passed in the following year, so it is a cut-off error: the ₩500 million of sales and the related cost of sales must be moved to the next year. (2) If the customer remitted on 30 December, the money should have reached AL’s bank account in December. If the bank credit date was in December, AL recorded the receipt late — a classification error overstating receivables and understating cash. If the bank credit date was in January, it may be a timing difference for funds in transit, so check the bank statement. If late recording of year-end receipts recurs, consider the possibility of lapping, a misappropriation scheme that covers stolen receipts with later ones.

References

  • Korean Institute of CPAs, Korean Standards on Auditing, KSA 501 Audit Evidence — Specific Considerations for Selected Items and KSA 505 External Confirmations
  • Korean Institute of CPAs, Korean Standards on Auditing, KSA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
  • Alvin Arens, Randal Elder and Mark Beasley, Auditing and Assurance Services, ch. 14, 16, 21, 23
O

Oiyo

Editorial Desk

The OIYO editorial desk researches money, law, lifestyle, and self-understanding topics against primary sources and public statistics. Every piece carries source notes and is reviewed on a regular cycle for accuracy and usefulness.