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Completing the Tests in the Sales and Collection Cycle: Accounts Receivable. Chapter 15. 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. Accuracy.

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completing the tests in the sales and collection cycle accounts receivable

Completing the Tests in theSales and Collection Cycle:Accounts Receivable

Chapter 15

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

Accuracy

Realizable

value

Existence

Classification

Rights and

obligations

Completeness

Cutoff

Presentation

and disclosure

methodology for designing tests of balances accounts receivable
Methodology for Designing Tests ofBalances – Accounts Receivable

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 balances accounts receivable1
Methodology for Designing Tests ofBalances – Accounts Receivable

Design and perform tests of

controls and substantive tests

of transactions for sales and

collection cycle.

Design and perform analytical

procedures for accounts

receivable balance.

methodology for designing tests of balances accounts receivable2
Methodology for Designing Tests ofBalances – Accounts Receivable

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

Existence

Accuracy

Cutoff

Presentation

and disclosure

Completeness

Classification

Realizable

value

Rights

Translation-Related

Audit Objectives

Sales

Existence

×

Completeness

×

Accuracy

×

Classification

×

Timing

×

Posting/Summary

×

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

Accounts Receivable

Balance-Related

Audit Objectives

Detail tie-in

Existence

Accuracy

Cutoff

Presentation

and disclosure

Completeness

Classification

Realizable

value

Rights

Translation-Related

Audit Objectives

Cash receipts

Existence

×

Completeness

×

Accuracy

×

Classification

×

Timing

×

Posting/Summary

×

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

Gross margin percentage with previous years

Sales by month over time

Sales returns and allowances as a percentage

of gross sales with previous years

by product line

analytical procedures for the sales and collection cycle1
Analytical Procedures for the Sales and Collection Cycle

Compare

Individual customer balances over a stated amount

Bad debt expense as a percentage of gross sales

Days that accounts receivable are outstanding

with previous years

analytical procedures for the sales and collection cycle2
Analytical Procedures for the Sales and Collection Cycle

Compare

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

with previous years

selected comparative information
Selected Comparative Information

Percent Percent

2002 Change 2001 Change 2000

(000) 02-01 (000) 00-01 (000)

Sales 144.3 9.4 132.0 6.5 124.0

Gross margin 39.8 9.3 36.4 7.1 34.0

Accounts receivable 20.2 7.4 18.8 13.9 16.5

Bad debt expense 3.3 (2.9) 3.4 9.7 3.1

Total assets 61.4 (7.0) 66.0 8.0 61.1

Net earnings 5.7 21.3 4.7 38.2 3.4

Number of accounts

receivable 258 16.7 221 5.7 209

analytical procedures sales and collection cycle
Analytical ProceduresSales and Collection Cycle

200220012000

Gross margin/net sales 27.8% 27.7% 27.5%

Sales R&A/gross sales .9% .9% .8%

Bad debt expense/net sales 2.3% 2.6% 2.4%

Allowance for uncollectible

accounts/accounts receivable 6.1% 8.2% 8.4%

Number of days receivables

outstanding 51.5 52.3 51.2

Net accounts receivable/

current assets 37.2% 38.6% 36.0%

design and perform tests of details of a r balance phase iii
Design and Perform Tests of Detailsof A/R Balance (Phase III)

Planned detection risk for each

objective is an auditor’s decision.

Combining the factors that determine

planned detection risk is complex.

analytical procedures for gross margin
Analytical Procedures for Gross Margin

Gross Margin Percent

20022001

Client Industry Client Industry

Hardwood 36.3 32.4 36.4 32.5

Softwood 23.9 22.0 20.3 22.1

Plywood 40.3 50.1 44.2 54.3

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 ofDetail of Balances

Aged trial balance

Recorded accounts receivable exist

Existing accounts receivable are included

Accounts receivable are accurate

Accounts receivable are properly classified

designing tests of detail of balances1
Designing Tests ofDetail of Balances

Cutoff for accounts receivable is correct

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 items for testing
Selection of Itemsfor 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 testing1
Selection of Itemsfor Testing

If a client tries to discourage the auditor from

sending confirmation to certain customers,

the auditor should consider the possibility

that the client is attempting to conceal

fictitious or known misstatements of

accounts receivable.

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 files.

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
CorrespondenceWith 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

Substantive tests

of transactions

results

Acceptable

audit risk

Planned detection

risk and planned

audit evidence

Inherent risk

Control risk