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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. 1. Detail tie-in.

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completing the tests in the sales and collection cycle accounts receivable

Completing the Testsin 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

1. Detail tie-in

5. Classification

2. Existence

6. Cutoff

3. Completeness

7. Realizable value

4. Accuracy

8. Rights

methodology for designing tests of details of balances for a r
Methodology for Designing Testsof Details of Balances for A/R

Identify client business

risks affecting

accounts receivable

Phase I

Set tolerable misstatement

and assess inherent risk

for accounts receivable

Phase I

Assess control risk for

sales and collection cycle

Phase I

methodology for designing tests of details of balances for a r1
Methodology for Designing Testsof Details of Balances for A/R

Design and perform

tests of controls and

substantive tests

of transactions

for the sales and

collection cycle

Phase II

methodology for designing tests of details of balances for a r2
Methodology for Designing Testsof Details of Balances for A/R

Design and perform

analytical procedures

for accounts

receivable balance

Phase III

Phase III

Design tests of

details of accounts

receivable balance

to satisfy

balance-related

audit objectives

Audit procedures

Sample size

Items to select

Timing

relationship between sales and accounts receivable
Relationship Between Sales and Accounts Receivable

ACCOUNTS RECEIVABLE

BALANCE-RELATED

AUDIT OBJECTIVES

Detail tie-in

Completeness

Classification

Realizable

value

Rights

Existence

Accuracy

Cutoff

Translation-related

audit objectives

Sales

Occurrence

×

Completeness

×

Accuracy

×

Posting and

summarization

×

Classification

×

Timing

×

relationship between sales and accounts receivable1
Relationship Between Sales and Accounts Receivable

ACCOUNTS RECEIVABLE

BALANCE-RELATED

AUDIT OBJECTIVES

Detail tie-in

Completeness

Classification

Realizable

value

Rights

Existence

Accuracy

Cutoff

Translation-related

audit objectives

Cash receipts

Occurrence

×

Completeness

×

Accuracy

×

Posting and

summarization

×

Classification

×

Timing

×

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
  • Write-off of uncollectible accounts as a
  • percentage of total accounts receivable
selected comparative information
Selected Comparative Information

12/31/09

($000)

Percent

change

2008-

2009

12/31/08

($000)

Percent

change

2007-

2008

12/31/07

($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

analytical procedures sales and collection cycle
Analytical Procedures: Sales and Collection Cycle

12/31/09

12/31/08

12/31/07

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%

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
learning objective 3
Learning Objective 3
  • Design and perform tests of
  • details of balances for accounts
  • receivable.
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
  • disclosure
learning objective 4
Learning Objective 4
  • Obtain and evaluate accounts
  • receivable confirmations.
confirmations are required except when
Confirmations Are Required, Except When:

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.

sample size
Sample Size
  • Tolerable misstatement
  • Inherent risk
  • Control risk
  • Achieved detection risk from
  • other substantive tests
  • Type of confirmation
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,

AU 330 requires follow-up procedures

for confirmations not returned by

the customer.

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.

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