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Completing the Tests in the Sales and Collection Cycle: Accounts Receivable Chapter 15 Accounts Receivable Balance-Related Audit Objectives Detail tie-in Accuracy Realizable value Existence Classification Rights and obligations Completeness Cutoff Presentation and disclosure

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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

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 receivable4
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 receivable5
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

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 cycle7
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 cycle8
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

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 balances10
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

confirmation of a r balance
Confirmation of A/R Balance
  • Primary audit procedure for testing existence, accuracy and cutoff
  • Addresses 5 of the 8 balance-related audit objectives (not classification, realizable value, and presentation & disclosure)
  • Expensive audit procedure – auditor and client time – but highly reliable evidence
  • Required procedure in normal circumstances
sas 67 exceptions to sending a r confirmations
SAS 67 Exceptions to Sending A/R Confirmations

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 – confirm the printed balance on the confirmation

Blank confirmation form – requests customer to fill in balance amount on the confirmation

Invoice confirmation – confirm one or more invoices Instead of the total balance

Negative confirmation – respond only if balance is incorrect

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

Stratification is desirable – based on dollar amount or length of time outstanding. But a sample is also needed for judging total population.

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 testing17
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.

evaluating returned confirmations
Evaluating Returned Confirmations
  • Clean responses – no follow up required
  • Responses with disagreement – follow up with the client for reason. Reasons could be timing issues, customer can’t confirm (or won’t), or errors. Customer completes the confirmation weeks after the cutoff date and their system does not allow them to go back to the cutoff date to accurately confirm.
  • No response – send a second request, do follow up procedures – subsequent receipts testing
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.

If customer paid for the goods, then the sale must exist.

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.

If a sales invoice was issued to a customer, then the sale most likely exists.

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.

drawing conclusions
Drawing Conclusions

Reevaluate internal control.

Evaluate the qualitative nature of misstatements.

Determine whether sufficient evidence was obtained.