Which approach can be applied when testing high-risk revenue transactions?

Which approach can be applied when testing high-risk revenue transactions?

• A. Tracing receipts to bank deposits
• B. Only reviewing sales contracts
• C. Changing accounting policies frequently
• D. Performing retrospective analyses of markets

Answer: (A)

Tracing receipts to bank deposits is an effective approach when testing high-risk revenue transactions because it provides direct evidence that the revenue recorded in the financial statements has been realized and received. This procedure involves following the flow of cash from the point of receipt back to the bank deposits, ensuring that all recorded sales are supported by actual cash received. It enhances the reliability of the revenue numbers, particularly for high-risk areas where there may be greater potential for misstatement or fraud. This tracing process can help auditors assess the completeness and occurrence of revenue, which are key assertions in revenue recognition. It also serves to confirm that the cash collected corresponds with the amounts that have been reported as revenue, thus verifying the integrity of the financial reporting related to revenues. The other approaches are less effective in this context. Simply reviewing sales contracts may not provide sufficient evidence of transaction completeness or existence. Changing accounting policies frequently could obscure trends and might make it difficult to determine the underlying realities of revenue performance, potentially raising concerns rather than providing clarity. Lastly, performing retrospective analyses of markets does not directly address the specific assurance needed for verifying revenue transactions and could result in a broader perspective without confirming the individual transactions at risk.

Tracing receipts to bank deposits is an effective approach when testing high-risk revenue transactions because it provides direct evidence that the revenue recorded in the financial statements has been realized and received. This procedure involves following the flow of cash from the point of receipt back to the bank deposits, ensuring that all recorded sales are supported by actual cash received. It enhances the reliability of the revenue numbers, particularly for high-risk areas where there may be greater potential for misstatement or fraud.

This tracing process can help auditors assess the completeness and occurrence of revenue, which are key assertions in revenue recognition. It also serves to confirm that the cash collected corresponds with the amounts that have been reported as revenue, thus verifying the integrity of the financial reporting related to revenues.

The other approaches are less effective in this context. Simply reviewing sales contracts may not provide sufficient evidence of transaction completeness or existence. Changing accounting policies frequently could obscure trends and might make it difficult to determine the underlying realities of revenue performance, potentially raising concerns rather than providing clarity. Lastly, performing retrospective analyses of markets does not directly address the specific assurance needed for verifying revenue transactions and could result in a broader perspective without confirming the individual transactions at risk.