Completing the tests in the sales and collection cycle accounts receivable
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Completing the Tests in the Sales and Collection Cycle: Accounts Receivable. Chapter 16. Learning Objective 1. Describe the methodology for designing tests of details of balances using the audit risk model. Accounts Receivable Balance-Related Audit Objectives. Detail tie-in. Existence.

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Completing the tests in the sales and collection cycle accounts receivable

Completing the Tests in the Sales and Collection Cycle:Accounts Receivable

Chapter 16


Learning objective 1

Learning Objective 1

  • Describe the methodology for

  • designing tests of details of

  • balances using the audit

  • risk model.


Accounts receivable balance related audit objectives

Accounts Receivable Balance-Related Audit Objectives

Detail tie-in

Existence

Completeness

Accuracy

Classification

Cutoff

Realizable

value

Rights

Presentation

and disclosure


Methodology for designing tests of details of balances for a r

Methodology for Designing Testsof Details of Balances for A/R

Phase I

Identify client business risks affecting accounts

receivable.

Set tolerable misstatement and assess inherent

risk for accounts receivable.

Assess control risk for sales and collection cycle.


Methodology for designing tests of details of balances for a r1

Methodology for Designing Testsof Details of Balances for A/R

Phase II

Design and perform tests of controls and

substantive tests of transactions for the

sales and collection cycle.


Methodology for designing tests of details of balances for a r2

Audit

procedures

Sample

size

Items to

select

Timing

Methodology for Designing Testsof Details of Balances for A/R

Phase III

Design and perform analytical procedures for

accounts receivable balance.

Design tests of details of accounts receivable

balance to satisfy balance-related audit objectives.


Relationship between sales and accounts receivable

Accounts receivable balance-related audit objectives

Detail tie-in

Existence

Completeness

Accuracy

Classification

Cutoff

Realizable

value

Rights

Presentation

and disclosure

Translation-related

audit objectives

Sales

Existence

×

Completeness

×

Accuracy

×

Classification

×

Timing

×

Posting/Summary

×

Relationship Between Sales and Accounts Receivable


Relationship between sales and accounts receivable1

Accounts receivable balance-related audit objectives

Detail tie-in

Existence

Completeness

Accuracy

Classification

Cutoff

Realizable

value

Rights

Presentation

and disclosure

Translation-related

audit objectives

Cash receipts

Existence

×

Completeness

×

Accuracy

×

Classification

×

Timing

×

Posting/Summary

×

Relationship Between Sales and Accounts Receivable


Learning objective 2

Learning Objective 2

  • Design and perform analytical

  • procedures for accounts in the

  • sales and collection cycle.


Analytical procedures for the sales and collection cycle

Analytical Procedures for the Sales and Collection Cycle

Compare by product line:

Gross margin percentage with previous years

Sales by month over time

Sales returns and allowances as a percentage of

gross sales with previous years


Analytical procedures for the sales and collection cycle1

Analytical Procedures for the Sales and Collection Cycle

Compare with previous years:

Individual customer balances over a stated amount

Bad debt expense as a percentage of gross sales

Days that accounts receivable are outstanding


Analytical procedures for the sales and collection cycle2

Analytical Procedures for the Sales and Collection Cycle

Compare with previous years:

Aging category as a percentage of receivables

Allowance for uncollectible accounts as a

percentage of accounts receivable

Charge-off of uncollectible accounts as a

percentage of total accounts receivable


Selected comparative information

12/31/04

($000)

Percent

change

2003-

2004

12/31/03

($000)

Percent

change

2002-

2003

12/31/02

($000)

Sales

Gross margin

Accounts receivable

Bad debt expense

Total current assets

Total assets

Net earnings

Number of accounts

receivable

Number of accts. rec. with

balances over $100,000

144,328

39,845

20,197

3,323

51,027

61,367

5,681

258

37

9.0

9.6

7.3

(2.1)

14.0

(7.0)

21.9

16.7

15.6

132,421

36,350

18,827

3,394

44,779

66,021

4,659

221

32

7.0

7.0

14.1

7.3

6.6

8.0

39.0

5.7

6.7

123,737

33,961

16,505

3,162

41,989

61,147

3,351

209

30

Selected Comparative Information


Analytical procedures sales and collection cycle

12/31/04

12/31/03

12/31/02

Gross margin/net sales

Sales returns and allowances/

gross sales

Bad debt expense/net sales

Allowance for uncollectible

accounts/accounts receivable

Number of days receivables

outstanding

Net accounts receivable/

current assets

27.85%

0.90%

2.30%

6.10%

48.09

37.20%

27.70%

0.90%

2.60%

7.50%

47.96

32.50%

27.68%

0.90%

2.60%

6.40%

49.32

32.30%

Analytical Procedures: Sales and Collection Cycle


Design and perform tests of details of a r balance phase iii

Design and Perform Tests of Details of A/R Balance (Phase III)

Planned detection risk for each objective

is an auditor decision.

Combining the factors that determine

planned detection risk is complex.


Analytical procedures for gross margin

Gross margin percent

2005

2004

2003

Great

Western

Industry

Great

Western

Industry

Great

Western

Industry

Hardwood

Softwood

Plywood

36.3

23.9

40.3

32.4

22.0

50.1

36.4

20.3

44.2

32.5

22.1

54.3

36.0

20.5

45.4

32.3

22.3

55.6

Analytical Procedures for Gross Margin


Learning objective 3

Learning Objective 3

  • Design and perform tests of

  • details of balances for accounts

  • receivable for each balance-

  • related audit objective.


Designing tests of detail of balances

Designing Tests of Detailof Balances

Accounts receivable are correctly added and

agree with the Master File and the General

Ledger (aged trial balance).

Recorded accounts receivable exist

Existing accounts receivable are included


Designing tests of detail of balances1

Designing Tests of Detailof Balances

Accounts receivable are accurate

Accounts receivable are properly classified

Cutoff for accounts receivable is correct


Designing tests of detail of balances2

Designing Tests of Detailof Balances

Accounts receivable is stated at realizable value

The client has rights to accounts receivable

Accounts receivable presentation and

disclosures are proper


Learning objective 4

Learning Objective 4

  • Obtain and evaluate accounts

  • receivable confirmations.


Aicpa requirements

AICPA Requirements

1.Accounts receivable are immaterial.

2.The auditor considers confirmations

ineffective evidence because response

rates will likely be inadequate or unreliable.

3.The combined level of inherent risk and

control risk is low and other substantive

evidence can be accumulated to provide

sufficient evidence.


Type of confirmation

Type of Confirmation

Positive confirmation

Blank confirmation form

Invoice confirmation

Negative confirmation


Timing

Timing

The most reliable evidence from confirmations

is obtained when they are sent as close to the

balance sheet date as possible, as opposed

to confirming the accounts several months

before year-end.


Sample size

Sample Size

Tolerable misstatement

Inherent risk

Control risk

Achieved detection risk from

other substantive tests

Type of confirmation


Selection of the items for testing

Selection of the Items for Testing

When selecting a sample of accounts receivable

for confirmation, the auditor should be careful

to avoid being influenced by the client.


Selection of items for testing

Selection of Items for Testing

If a client tries to discourage the auditor from

sending confirmations to certain customers,

the auditor should consider the possibility

that the client is attempting to conceal

fictitious or known misstatements

of accounts receivable.


Maintaining control

Maintaining Control

After the items for confirmation have been

selected, the auditor must maintain control

of the confirmations until they are returned

from the customer.


Follow up on nonresponses

Follow-up on Nonresponses

When positive confirmations are used,

SAS 67 requires follow-up procedures

for confirmations not returned by

he customer.

Alternative procedures


Subsequent cash receipts

Subsequent Cash Receipts

Evidence of the receipt of cash subsequent

to the confirmation date includes examining

remittance advices, entries in the cash

receipts records, or perhaps even

subsequent credits in the accounts

receivable master file.


Duplicate sales invoices

Duplicate Sales Invoices

These are useful in verifying the actual

issuance of a sales invoice and the

actual date of the billing.


Shipping documents

Shipping Documents

These are important in establishing

whether the shipment was actually

made and as a test of cutoff.


Correspondence with the client

Correspondence With the Client

Usually, the auditor does not need to review

correspondence as a part of alternative

procedures, but correspondence can

be used to disclose disputed and

questionable receivables not

uncovered by other means.


Analysis of difference

Analysis of Difference

Payment has already been made

Goods have not been received

The goods have been returned

Clerical errors and disputed accounts


Drawing conclusions

Drawing Conclusions

Reevaluate internal control.

Evaluate the qualitative nature of

misstatements.

Determine whether sufficient evidence

was obtained.


Learning objective 5

Learning Objective 5

  • Design audit procedures for the

  • audit of accounts receivable,

  • using an evidence planning

  • worksheet as a guide.


Source of each row in the evidence planning worksheet

Source of Each Row in the Evidence Planning Worksheet

  • Tolerable misstatement

  • Acceptable audit risk

  • Inherent risk

  • Control risk

  • Substantive tests of

    transactions results

  • Analytical procedures

  • Planned detection risk and

    planned audit evidence


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