Completing the Tests in theSales 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 Realizable value Existence Classification Rights and obligations Completeness Cutoff Presentation and disclosure
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 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 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 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 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 Design and perform analytical procedures for accounts in 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 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 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 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 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 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 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 Design and perform tests of details of balances for accounts receivable for each balance- related audit objective.
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 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 Obtain and evaluate accounts receivable confirmations.
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 Positive confirmation Blank confirmation form Invoice confirmation Negative confirmation
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 Tolerable misstatement Inherent risk Control risk Achieved detection risk from other substantive tests Type of confirmation
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 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 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 These are useful in verifying the actual issuance of a sales invoice and the actual date of the billing.
Shipping Documents These are important in establishing whether the shipment was actually made and as a test of cutoff.
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 Payment has already been made Goods have not been received The goods have been returned Clerical errors and disputed accounts
Drawing Conclusions Reevaluate internal control. Evaluate the qualitative nature of misstatements. Determine whether sufficient evidence was obtained.
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 Tolerable misstatement Substantive tests of transactions results Acceptable audit risk Planned detection risk and planned audit evidence Inherent risk Control risk