Revenue and Cash Proof Testing

Overview

Revenue and cash proof testing checks whether the revenue and profit a business reports are backed by genuine transactions and by cash that has actually reached the bank. It is a targeted procedure within financial due diligence, designed to give a buyer, lender or investor evidence rather than reliance on management's figures.

The approach reconciles the accounting records to external evidence. Revenue is traced from the ledger to invoices, contracts and delivery records, and then to bank receipts. Earnings are reconciled to cash movements over the period, so differences are identified and explained.

What the service covers

The procedures are tailored to the business and to the risk areas identified. They typically include:

• Revenue proof: reconciliation of sales per the ledger to management accounts, statutory accounts and tax or sales filings where available.
• Transaction testing: sampling of invoices traced to contracts, orders and evidence of delivery or performance.
• Cash proof: reconciliation of cash receipts and payments in the bank statements to the ledger over the review period.
• Cut-off testing around period ends, including credit notes and returns issued after the period.
• Trade receivables: ageing, subsequent cash receipt and recoverability.
• Analysis of unusual items, such as round-sum transactions, related-party flows, large manual journals and unexplained reconciling items.
• The link between reported EBITDA, operating cash flow and movements in the bank balances.

Key activities and deliverables

Key activities

• Obtain bank statements, ledger extracts, sales listings and supporting documents directly from source where possible.
• Reconcile totals across the ledger, the management accounts and the financial statements.
• Select and test a sample of transactions, using a basis suited to the size and risk profile of the population.
• Match bank receipts to invoices and customers, and investigate unmatched amounts.
• Build a proof of cash showing opening cash, receipts, payments and closing cash against the records.
• Document each exception, quantify its effect on revenue or earnings and report it with our assessment.

Deliverables

• A revenue reconciliation and a proof of cash schedule for the period reviewed.
• A summary of testing performed, samples selected and results.
• A schedule of exceptions and unexplained differences with their potential effect on earnings.
• An assessment of the reliability of the reported revenue and cash figures.
• Recommendations for further work where findings warrant it.

Our approach and methodology

We define the objective with you first: whether the concern is existence of revenue, completeness, timing or the conversion of profit into cash. The sample, the period and the depth of testing follow from that objective and from the available records.

Evidence from outside the company, such as bank statements and customer records, carries more weight than internal documents, and we say clearly which type of evidence supports each conclusion. These procedures are not a forensic investigation. If our work indicates possible irregularities, we will tell you and recommend that appropriate specialist forensic work is considered.

Benefits for clients

• Evidence that reported revenue and profit are real and supported by cash.
• Earlier detection of overstated sales, weak cut-off or unrecorded liabilities.
• Greater confidence in earnings figures where audited accounts are limited or unavailable.
• Stronger grounds for adjusting price or deal terms if the numbers do not hold.
• A defined, proportionate procedure that avoids the cost of a full investigation.

Who needs this service

Revenue and cash proof testing is most often needed where records are less formal or the risk of misstatement is higher:

• Acquirers and investors in owner-managed, cash-intensive or fast-growing businesses.
• Lenders testing the earnings that support a credit request.
• Buyers where audited accounts are absent, qualified or out of date.
• Businesses with significant related-party sales or concentrated customers.
• Boards or owners who need confidence in the figures reported to them.

Scope and limitations

Our work is advisory. It is not an audit or a review under auditing standards and does not provide assurance on the financial information. We rely on the information and explanations management provides, and we state the basis of preparation and any limitations in our report.