SlideShare a Scribd company logo

Accounts receivable & cash balances

•Download as PPT, PDF•
•
B
bagarza
Education
1 of 34
AUDITING CHAPTER 11 Accounts Receivable & Cash Balances By David N. Ricchiute
REVENUE/RECEIPT CYCLE Relationship assertions & audit procedures Relationship audit risk, client strategies, substantive tests Substantive tests for assertions Revenue recognition, earnings manipulation, & channel stuffing Audit sampling & accounts receivable 2 Computer-assisted audit techniques GBW 8th ed. Ch. 11
ASSERTIONS & OBJECTIVES Management assertions: Recorded receivables & cash balances  Exist  Include all transactions (completeness)  Represent rights of entity  Are valued appropriately  Are presented & disclosed properly 3 GBW 8th ed. Ch. 11
OBJECTIVES & PROCEDURES: Existence/Occurrence Objective: determine whether all recorded sales, receivables, cash balances Procedures  Existence  Physical observation  Confirmation  Transactions occurred  Cutoff testing for proper period 4 GBW 8th ed. Ch. 11
OBJECTIVES & PROCEDURES: Completeness Objective: determine whether all receivables, sales, cash of period are presented in financial statements Procedures  Examine documents  Apply analytical procedures  Cutoff bank statements, bank reconciliations, etc. 5 GBW 8th ed. Ch. 11
OBJECTIVES & PROCEDURES: Rights/Obligations Objective: determine whether entity has property rights to cash, accounts receivable Procedures  Examine documentation  Confirmations  Inquiries 6 GBW 8th ed. Ch. 11
OBJECTIVES & PROCEDURES: Valuation, Allocation Objective: determine whether entity has recorded items in correct amounts, accounts, & time periods Procedures  Confirm balances  Verify mathematical accuracy  Examine details of recording 7 GBW 8th ed. Ch. 11
OBJECTIVES & PROCEDURES: Presentation, Disclosure Objective: determine whether recorded transactions, balances properly classified, described, disclosed Procedures  Compare presentation to GAAP  Annual updates of AICPA guidelines 8 GBW 8th ed. Ch. 11
AUDIT RISK MODEL AR = CR x IR x DR Detection risk (DR): likelihood that error could occur & not be detected Based on  Control risk (CR)  Likelihood of material error  Inherent risk (IR)  Strategies & threats 9 GBW 8th ed. Ch. 11
DETECTION RISK DR = ____AR___ IR x CR Nature, extent, timing substantive tests  Nature: more/less persuasive tests  Extent: larger/smaller samples  Timing: balance sheet date or interim 10 GBW 8th ed. Ch. 11
ASSERTIONS & PROCEDURES Accounts Receivable, Sales-1 Valuation Verify mathematical accuracy AR  Obtain aged trial balance  Foot trial balance  Compare total AR per trial balance to general ledger 11 GBW 8th ed. Ch. 11
ASSERTIONS & PROCEDURES Accounts Receivable, Sales-2 Existence, rights, valuation Confirm year-end accounts & notes receivable with debtors  Positive: tell auditor if balance correct  Large balances, inaccuracies  Negative: tell auditor only if balance incorrect  Control adequate, small balances 12 GBW 8th ed. Ch. 11
ASSERTIONS & PROCEDURES Accounts Receivable, Sales-3 Existence or occurrence, completeness Test cutoff to determine whether sales, receivables recorded in proper period  FOB shipping point  FOB destination 13 GBW 8th ed. Ch. 11
ASSERTIONS & PROCEDURES Accounts Receivable, Sales-4 Valuation, rights Review collectibility receivables Determine adequacy allowance for doubtful accounts 14 GBW 8th ed. Ch. 11
ASSERTIONS & PROCEDURES Accounts Receivable, Sales-5 Existence or occurrence, completeness, valuation Perform analytical procedures for reasonableness of sales, receivables balances  Collections problems  Overstated sales  Understated sales 15 GBW 8th ed. Ch. 11
ASSERTIONS & PROCEDURES Accounts Receivable, Sales-6 Presentation & disclosure Review financial statements to determine  Accounts, notes receivable properly classified, described  Disclosures adequate 16 GBW 8th ed. Ch. 11
TESTING CUTOFF Sales, Receivables At or around end each quarter, the former President directed his subordinates to hold IGI’s books open, to backdate invoices, shipping documents. This caused IGI to record out-of-period sales & to overstate revenue, net income end each quarter. Procedures  Trace recorded sales to shipping documents before, after end of period 17 GBW 8th ed. Ch. 11
ASSERTIONS & PROCEDURES: Cash-1 Existence, rights, valuation Confirm year end balances with all banks 18 GBW 8th ed. Ch. 11
ASSERTIONS & PROCEDURES: Cash-2 Valuation Verify mathematical accuracy recorded cash balances  Foot cash journals  Trace totals to general ledger, year-end bank reconciliations  Test cash on hand 19 GBW 8th ed. Ch. 11
ASSERTIONS & PROCEDURES: Cash-3 Existence, completeness, valuation Test cutoff  Obtain cutoff bank statement  Verify accuracy  Examine & trace to bank reconciliations & cash journals  Proof of cash  Reconcile recorded cash with bank confirmation  Examine interbank, intercompany transfers 20 GBW 8th ed. Ch. 11
ASSERTIONS & PROCEDURES: Cash-4 Presentation & disclosure Review financial statements to determine  Cash balances properly classified, described  Disclosures adequate 21 GBW 8th ed. Ch. 11
TESTING CUTOFF FOR CASH Reconcile internal documents  Cash journals  General ledger  Bank reconciliations With external documents  Year-end bank statement  Cutoff bank statements  Bank confirmations 22 GBW 8th ed. Ch. 11
REVENUE RECOGNITION & EARNINGS MANIPULATION Increasingly, I have become concerned that the motivation to meet Wall Street earnings expectations may be overriding common sense business practices. Arthur Levitt, Jr., “The ‘Numbers Game.” Speech NYU, 1998. 23 GBW 8th ed. Ch. 11
REVENUE RECOGNITION SAB 104 Criteria  Persuasive evidence of arrangement exists  Delivery has occurred or services rendered  Seller’s price fixed or determinable  Collectibility reasonably assured 24 GBW 8th ed. Ch. 11
COMMON MEANS TO MANIPULATE EARNINGS - 1 Method Revenue Recognition Error Bill & hold Shipments to 3rd party warehouses Cancelled orders Cancelled, duplicate orders Conditional sales Before contingencies resolved Consignment sales Goods on consignment, trial Continuing Seller involved after delivery, e.g., involvement installation Improper cutoff Before title, risk ownership passed 25 GBW 8th ed. Ch. 11
COMMON MEANS TO MANIPULATE EARNINGS - 2 Method Revenue Recognition Error Kickback sales Inflated selling price for kickback Overstated Inflated % completion on construction completion projects Partial shipments Not all goods ordered are shipped Pre-invoicing Goods still in production Premature Goods ordered but not authorized for shipment shipment 26 GBW 8th ed. Ch. 11
COMMON MEANS TO MANIPULATE EARNINGS - 3 Method Revenue Recognition Error Premature sales Goods ordered but not shipped Sham sales False shipments Side agreements To forestall completion earnings process Uncertain Seller’s performance uncertain performance Collection uncertain, unlikely Uncertain realization Unauthorized Shipments not authorized shipment 27 GBW 8th ed. Ch. 11
MANIPULATED EARNINGS Channel Stuffing Definition: incentives to induce incremental demand Examples  Bausch & Lomb  Told distributors to buy large amount of inventory to maintain distributorship  B&L recognized extra $22 million  Sunbeam  Used price discounting to encourage customers to hold 80 weeks of inventory 28 GBW 8th ed. Ch. 11
MANIPULATED EARNINGS Asset Swaps Definition: companies trading right to use others asset Examples  Global Crossing  Treated underseas cables as real estate  Recognized revenue by treating swap as sale 29 GBW 8th ed. Ch. 11
MANIPULATED EARNINGS Other Improper expense capitalization  Chambers Development  Capitalized landfill expenses after determining earnings necessary to meet analysts expectations  MicroStrategy  Recognized revenue before all services provided for software sales 30 GBW 8th ed. Ch. 11
ACCOUNTS RECEIVABLE Update assessment of control risk Planning confirmations & selecting plan  Identify population, sampling unit, anticipated error  Estimate tolerable error & risk incorrect acceptance  Calculate sample size  Choose sample selection method  Evaluate results 31 GBW 8th ed. Ch. 11
COMPUTER ASSISTED TESTS: AR Accuracy Foot, crossfoot recorded amounts within master file Total balances Display/print exceptions 32 GBW 8th ed. Ch. 11
COMPUTER ASSISTED TESTS: AR Aging Trace individual balances from master file to sales journal Classify balances by invoice dates/age Display/print aged trial balances 33 GBW 8th ed. Ch. 11
COMPUTER ASSISTED TESTS: AR Credit Balances Scan master receivables file for net credit balances Display/print listing credit balance accounts 34 GBW 8th ed. Ch. 11

Recommended

Accounts Payable Processing Presentation
Accounts Payable Processing PresentationAccounts Payable Processing Presentation
Accounts Payable Processing Presentationrdpigott
 
Auditing investments
Auditing investmentsAuditing investments
Auditing investmentsSteffy H. Mallangi'
 
Account Payable
Account PayableAccount Payable
Account PayableAnkur Rastogi
 
Financial Statements and Credit Analysis
Financial Statements and Credit AnalysisFinancial Statements and Credit Analysis
Financial Statements and Credit AnalysisUttam Satapathy
 
Accounts payable
Accounts payableAccounts payable
Accounts payableSSCProfesionalPvtLtd
 
Accounting grade 11- Chapter 4 recording of transaction ii
Accounting grade 11- Chapter 4 recording of transaction iiAccounting grade 11- Chapter 4 recording of transaction ii
Accounting grade 11- Chapter 4 recording of transaction iiHuma Tarannum
 
Accounts receivable
Accounts receivableAccounts receivable
Accounts receivableNajmus-Saquib Khan
 
Trade receivables
Trade receivablesTrade receivables
Trade receivablesAdmin SBS
 

Recommended

Accounts Payable Processing Presentation
Accounts Payable Processing PresentationAccounts Payable Processing Presentation
Accounts Payable Processing Presentationrdpigott
 
Auditing investments
Auditing investmentsAuditing investments
Auditing investmentsSteffy H. Mallangi'
 
Account Payable
Account PayableAccount Payable
Account PayableAnkur Rastogi
 
Financial Statements and Credit Analysis
Financial Statements and Credit AnalysisFinancial Statements and Credit Analysis
Financial Statements and Credit AnalysisUttam Satapathy
 
Accounts payable
Accounts payableAccounts payable
Accounts payableSSCProfesionalPvtLtd
 
Accounting grade 11- Chapter 4 recording of transaction ii
Accounting grade 11- Chapter 4 recording of transaction iiAccounting grade 11- Chapter 4 recording of transaction ii
Accounting grade 11- Chapter 4 recording of transaction iiHuma Tarannum
 
Accounts receivable
Accounts receivableAccounts receivable
Accounts receivableNajmus-Saquib Khan
 
Trade receivables
Trade receivablesTrade receivables
Trade receivablesAdmin SBS
 
Audit of Cash Balances
Audit of Cash BalancesAudit of Cash Balances
Audit of Cash BalancesJames Raymond Matibag
 
Lecture 21 expenditure cycle part i - accounting information systesm james ...
Lecture 21 expenditure cycle part i - accounting information systesm james ...Lecture 21 expenditure cycle part i - accounting information systesm james ...
Lecture 21 expenditure cycle part i - accounting information systesm james ...Habib Ullah Qamar
 
Errors In Proof Of Cash Baba2010
Errors In Proof Of Cash Baba2010Errors In Proof Of Cash Baba2010
Errors In Proof Of Cash Baba2010University of St. La Salle-Bacolod BABA
 
Topic 7 brs
Topic 7 brsTopic 7 brs
Topic 7 brsSrinivas Methuku
 
Audit of the acquisition and payment cycle
Audit of the acquisition and payment cycleAudit of the acquisition and payment cycle
Audit of the acquisition and payment cyclesellyhood
 
Accounts payable and receivable introductions
Accounts payable and receivable introductionsAccounts payable and receivable introductions
Accounts payable and receivable introductionsAltacit Global
 
Unit 1 Introduction to Audit
Unit 1 Introduction to AuditUnit 1 Introduction to Audit
Unit 1 Introduction to AuditAjay Nazarene
 
Banking Reconciliation Statement
Banking Reconciliation Statement Banking Reconciliation Statement
Banking Reconciliation Statement santhoshs176
 
The Accounts Payable Process
The Accounts Payable ProcessThe Accounts Payable Process
The Accounts Payable ProcessOliviaSmith160
 
Audit of property plant & equipment (PPE) and cash & cash equivalents (CCE)
Audit of property plant & equipment (PPE) and cash & cash equivalents (CCE)Audit of property plant & equipment (PPE) and cash & cash equivalents (CCE)
Audit of property plant & equipment (PPE) and cash & cash equivalents (CCE)MD ASADUZZAMAN
 
6. vouching
6. vouching6. vouching
6. vouchingSyed Osama Rizvi
 
Accounts payable-notes
Accounts payable-notesAccounts payable-notes
Accounts payable-notesRangabashyam S
 
Chapter 5 Bank Reconciliation statement.pptx
Chapter 5 Bank Reconciliation statement.pptxChapter 5 Bank Reconciliation statement.pptx
Chapter 5 Bank Reconciliation statement.pptxShanthini28
 
Expense
ExpenseExpense
ExpenseArthik Davianti
 
Topic 8 audit of revenue & receipts cycle + acc receivable
Topic 8 audit of revenue & receipts cycle + acc receivableTopic 8 audit of revenue & receipts cycle + acc receivable
Topic 8 audit of revenue & receipts cycle + acc receivablesakura rena
 
ACCA F-8, CH # 14, Receivables
ACCA F-8, CH # 14, ReceivablesACCA F-8, CH # 14, Receivables
ACCA F-8, CH # 14, ReceivablesArsalan Khan
 
Lecture 10, Chapter 14, Auditing Sales and Receivables
Lecture 10, Chapter 14, Auditing Sales and ReceivablesLecture 10, Chapter 14, Auditing Sales and Receivables
Lecture 10, Chapter 14, Auditing Sales and ReceivablesSazzad Hossain, ITP, MBA, CSCA™
 
ACCOUNTING BASICS &PRINCIPLES
ACCOUNTING BASICS &PRINCIPLESACCOUNTING BASICS &PRINCIPLES
ACCOUNTING BASICS &PRINCIPLESChristine Michael
 
2448759 sectional-and-self-balancing-system
2448759 sectional-and-self-balancing-system2448759 sectional-and-self-balancing-system
2448759 sectional-and-self-balancing-systemAbhimanyu Krishna
 
Accounts Payable (AP) Process Flow
Accounts Payable (AP) Process FlowAccounts Payable (AP) Process Flow
Accounts Payable (AP) Process FlowMukeshkumar Raju
 
Introduction to auditing the revenue process
Introduction to auditing the revenue processIntroduction to auditing the revenue process
Introduction to auditing the revenue processMengsongNguon
 
auditing the revenue process is a procedure to supervise revenue flow of cash...
auditing the revenue process is a procedure to supervise revenue flow of cash...auditing the revenue process is a procedure to supervise revenue flow of cash...
auditing the revenue process is a procedure to supervise revenue flow of cash...MengsongNguon
 

More Related Content

What's hot

Lecture 21 expenditure cycle part i - accounting information systesm james ...
Lecture 21 expenditure cycle part i - accounting information systesm james ...Lecture 21 expenditure cycle part i - accounting information systesm james ...
Lecture 21 expenditure cycle part i - accounting information systesm james ...Habib Ullah Qamar
 
Audit of the acquisition and payment cycle
Audit of the acquisition and payment cycleAudit of the acquisition and payment cycle
Audit of the acquisition and payment cyclesellyhood
 
Accounts payable and receivable introductions
Accounts payable and receivable introductionsAccounts payable and receivable introductions
Accounts payable and receivable introductionsAltacit Global
 
Unit 1 Introduction to Audit
Unit 1 Introduction to AuditUnit 1 Introduction to Audit
Unit 1 Introduction to AuditAjay Nazarene
 
Banking Reconciliation Statement
Banking Reconciliation Statement Banking Reconciliation Statement
Banking Reconciliation Statement santhoshs176
 
The Accounts Payable Process
The Accounts Payable ProcessThe Accounts Payable Process
The Accounts Payable ProcessOliviaSmith160
 
Audit of property plant & equipment (PPE) and cash & cash equivalents (CCE)
Audit of property plant & equipment (PPE) and cash & cash equivalents (CCE)Audit of property plant & equipment (PPE) and cash & cash equivalents (CCE)
Audit of property plant & equipment (PPE) and cash & cash equivalents (CCE)MD ASADUZZAMAN
 
Accounts payable-notes
Accounts payable-notesAccounts payable-notes
Accounts payable-notesRangabashyam S
 
Chapter 5 Bank Reconciliation statement.pptx
Chapter 5 Bank Reconciliation statement.pptxChapter 5 Bank Reconciliation statement.pptx
Chapter 5 Bank Reconciliation statement.pptxShanthini28
 
Topic 8 audit of revenue & receipts cycle + acc receivable
Topic 8 audit of revenue & receipts cycle + acc receivableTopic 8 audit of revenue & receipts cycle + acc receivable
Topic 8 audit of revenue & receipts cycle + acc receivablesakura rena
 
ACCA F-8, CH # 14, Receivables
ACCA F-8, CH # 14, ReceivablesACCA F-8, CH # 14, Receivables
ACCA F-8, CH # 14, ReceivablesArsalan Khan
 
ACCOUNTING BASICS &PRINCIPLES
ACCOUNTING BASICS &PRINCIPLESACCOUNTING BASICS &PRINCIPLES
ACCOUNTING BASICS &PRINCIPLESChristine Michael
 
2448759 sectional-and-self-balancing-system
2448759 sectional-and-self-balancing-system2448759 sectional-and-self-balancing-system
2448759 sectional-and-self-balancing-systemAbhimanyu Krishna
 
Accounts Payable (AP) Process Flow
Accounts Payable (AP) Process FlowAccounts Payable (AP) Process Flow
Accounts Payable (AP) Process FlowMukeshkumar Raju
 

What's hot (20)

Audit of Cash Balances
Audit of Cash BalancesAudit of Cash Balances
Audit of Cash Balances
 
Lecture 21 expenditure cycle part i - accounting information systesm james ...
Lecture 21 expenditure cycle part i - accounting information systesm james ...Lecture 21 expenditure cycle part i - accounting information systesm james ...
Lecture 21 expenditure cycle part i - accounting information systesm james ...
 
Errors In Proof Of Cash Baba2010
Errors In Proof Of Cash Baba2010Errors In Proof Of Cash Baba2010
Errors In Proof Of Cash Baba2010
 
Topic 7 brs
Topic 7 brsTopic 7 brs
Topic 7 brs
 
Audit of the acquisition and payment cycle
Audit of the acquisition and payment cycleAudit of the acquisition and payment cycle
Audit of the acquisition and payment cycle
 
Accounts payable and receivable introductions
Accounts payable and receivable introductionsAccounts payable and receivable introductions
Accounts payable and receivable introductions
 
Unit 1 Introduction to Audit
Unit 1 Introduction to AuditUnit 1 Introduction to Audit
Unit 1 Introduction to Audit
 
Banking Reconciliation Statement
Banking Reconciliation Statement Banking Reconciliation Statement
Banking Reconciliation Statement
 
The Accounts Payable Process
The Accounts Payable ProcessThe Accounts Payable Process
The Accounts Payable Process
 
Audit of property plant & equipment (PPE) and cash & cash equivalents (CCE)
Audit of property plant & equipment (PPE) and cash & cash equivalents (CCE)Audit of property plant & equipment (PPE) and cash & cash equivalents (CCE)
Audit of property plant & equipment (PPE) and cash & cash equivalents (CCE)
 
6. vouching
6. vouching6. vouching
6. vouching
 
Accounts payable-notes
Accounts payable-notesAccounts payable-notes
Accounts payable-notes
 
Chapter 5 Bank Reconciliation statement.pptx
Chapter 5 Bank Reconciliation statement.pptxChapter 5 Bank Reconciliation statement.pptx
Chapter 5 Bank Reconciliation statement.pptx
 
Expense
ExpenseExpense
Expense
 
Topic 8 audit of revenue & receipts cycle + acc receivable
Topic 8 audit of revenue & receipts cycle + acc receivableTopic 8 audit of revenue & receipts cycle + acc receivable
Topic 8 audit of revenue & receipts cycle + acc receivable
 
ACCA F-8, CH # 14, Receivables
ACCA F-8, CH # 14, ReceivablesACCA F-8, CH # 14, Receivables
ACCA F-8, CH # 14, Receivables
 
Lecture 10, Chapter 14, Auditing Sales and Receivables
Lecture 10, Chapter 14, Auditing Sales and ReceivablesLecture 10, Chapter 14, Auditing Sales and Receivables
Lecture 10, Chapter 14, Auditing Sales and Receivables
 
ACCOUNTING BASICS &PRINCIPLES
ACCOUNTING BASICS &PRINCIPLESACCOUNTING BASICS &PRINCIPLES
ACCOUNTING BASICS &PRINCIPLES
 
2448759 sectional-and-self-balancing-system
2448759 sectional-and-self-balancing-system2448759 sectional-and-self-balancing-system
2448759 sectional-and-self-balancing-system
 
Accounts Payable (AP) Process Flow
Accounts Payable (AP) Process FlowAccounts Payable (AP) Process Flow
Accounts Payable (AP) Process Flow
 

Similar to Accounts receivable & cash balances

Introduction to auditing the revenue process
Introduction to auditing the revenue processIntroduction to auditing the revenue process
Introduction to auditing the revenue processMengsongNguon
 
auditing the revenue process is a procedure to supervise revenue flow of cash...
auditing the revenue process is a procedure to supervise revenue flow of cash...auditing the revenue process is a procedure to supervise revenue flow of cash...
auditing the revenue process is a procedure to supervise revenue flow of cash...MengsongNguon
 
Audit of Receivables.pptx
Audit of Receivables.pptxAudit of Receivables.pptx
Audit of Receivables.pptxJayLloyd8
 
trade receivable and trade payable
trade receivable and trade payabletrade receivable and trade payable
trade receivable and trade payablestudent
 
Arens12e 14
Arens12e 14Arens12e 14
Arens12e 14John Sy
 
Topic 8 audit of revenue & receipts cycle + acc receivable (1)
Topic 8 audit of revenue & receipts cycle + acc receivable (1)Topic 8 audit of revenue & receipts cycle + acc receivable (1)
Topic 8 audit of revenue & receipts cycle + acc receivable (1)sakura rena
 
Intermediate Accounting . CH 18 . by MidoCool
Intermediate Accounting . CH 18 . by MidoCoolIntermediate Accounting . CH 18 . by MidoCool
Intermediate Accounting . CH 18 . by MidoCoolMahmoud Mohamed
 
Task 5 payables audit programme_v2
Task 5 payables audit programme_v2Task 5 payables audit programme_v2
Task 5 payables audit programme_v2AndreaAdanza107
 
Final visit receivables
Final visit receivablesFinal visit receivables
Final visit receivablesJeamsVidal
 
3 cash and rec.pptx ty36783495tyujkgvdu89
3 cash and rec.pptx ty36783495tyujkgvdu893 cash and rec.pptx ty36783495tyujkgvdu89
3 cash and rec.pptx ty36783495tyujkgvdu89Aster18
 
Auditing aicpa, assurance and attestation services
Auditing aicpa, assurance and attestation servicesAuditing aicpa, assurance and attestation services
Auditing aicpa, assurance and attestation servicesbagarza
 
Assertions in the Audit of Financial Statements (Audit)
Assertions in the Audit of Financial Statements (Audit)Assertions in the Audit of Financial Statements (Audit)
Assertions in the Audit of Financial Statements (Audit)Artless Shakhawat
 
Business Combinations - Ind AS Implementation Challenges
Business Combinations - Ind AS Implementation ChallengesBusiness Combinations - Ind AS Implementation Challenges
Business Combinations - Ind AS Implementation ChallengesAnkita6745
 
1WEEK 2 TEAM ASSIGNMENTWeek 2 .docx
1WEEK 2 TEAM ASSIGNMENTWeek 2 .docx1WEEK 2 TEAM ASSIGNMENTWeek 2 .docx
1WEEK 2 TEAM ASSIGNMENTWeek 2 .docxfelicidaddinwoodie
 
Identify the type of evidence for each procedure Procedure Type of Evi.docx
Identify the type of evidence for each procedure Procedure Type of Evi.docxIdentify the type of evidence for each procedure Procedure Type of Evi.docx
Identify the type of evidence for each procedure Procedure Type of Evi.docxMaxd78Pipero
 
Case 3_pp_final_v2 gr3
Case 3_pp_final_v2 gr3Case 3_pp_final_v2 gr3
Case 3_pp_final_v2 gr3malenacharur
 

Similar to Accounts receivable & cash balances (20)

Introduction to auditing the revenue process
Introduction to auditing the revenue processIntroduction to auditing the revenue process
Introduction to auditing the revenue process
 
auditing the revenue process is a procedure to supervise revenue flow of cash...
auditing the revenue process is a procedure to supervise revenue flow of cash...auditing the revenue process is a procedure to supervise revenue flow of cash...
auditing the revenue process is a procedure to supervise revenue flow of cash...
 
Audit of Receivables.pptx
Audit of Receivables.pptxAudit of Receivables.pptx
Audit of Receivables.pptx
 
0324226292 32919
0324226292 329190324226292 32919
0324226292 32919
 
trade receivable and trade payable
trade receivable and trade payabletrade receivable and trade payable
trade receivable and trade payable
 
Arens12e 14
Arens12e 14Arens12e 14
Arens12e 14
 
Topic 8 audit of revenue & receipts cycle + acc receivable (1)
Topic 8 audit of revenue & receipts cycle + acc receivable (1)Topic 8 audit of revenue & receipts cycle + acc receivable (1)
Topic 8 audit of revenue & receipts cycle + acc receivable (1)
 
Intermediate Accounting . CH 18 . by MidoCool
Intermediate Accounting . CH 18 . by MidoCoolIntermediate Accounting . CH 18 . by MidoCool
Intermediate Accounting . CH 18 . by MidoCool
 
Task 5 payables audit programme_v2
Task 5 payables audit programme_v2Task 5 payables audit programme_v2
Task 5 payables audit programme_v2
 
Final visit receivables
Final visit receivablesFinal visit receivables
Final visit receivables
 
3 cash and rec.pptx ty36783495tyujkgvdu89
3 cash and rec.pptx ty36783495tyujkgvdu893 cash and rec.pptx ty36783495tyujkgvdu89
3 cash and rec.pptx ty36783495tyujkgvdu89
 
Auditing aicpa, assurance and attestation services
Auditing aicpa, assurance and attestation servicesAuditing aicpa, assurance and attestation services
Auditing aicpa, assurance and attestation services
 
Audit working-papers
Audit working-papersAudit working-papers
Audit working-papers
 
Assertions in the Audit of Financial Statements (Audit)
Assertions in the Audit of Financial Statements (Audit)Assertions in the Audit of Financial Statements (Audit)
Assertions in the Audit of Financial Statements (Audit)
 
Auditing 304 part4
Auditing 304 part4Auditing 304 part4
Auditing 304 part4
 
1
11
1
 
Business Combinations - Ind AS Implementation Challenges
Business Combinations - Ind AS Implementation ChallengesBusiness Combinations - Ind AS Implementation Challenges
Business Combinations - Ind AS Implementation Challenges
 
1WEEK 2 TEAM ASSIGNMENTWeek 2 .docx
1WEEK 2 TEAM ASSIGNMENTWeek 2 .docx1WEEK 2 TEAM ASSIGNMENTWeek 2 .docx
1WEEK 2 TEAM ASSIGNMENTWeek 2 .docx
 
Identify the type of evidence for each procedure Procedure Type of Evi.docx
Identify the type of evidence for each procedure Procedure Type of Evi.docxIdentify the type of evidence for each procedure Procedure Type of Evi.docx
Identify the type of evidence for each procedure Procedure Type of Evi.docx
 
Case 3_pp_final_v2 gr3
Case 3_pp_final_v2 gr3Case 3_pp_final_v2 gr3
Case 3_pp_final_v2 gr3
 

Recently uploaded

SECOND SEMESTER TOPIC COVERAGE SY 2023-2024 Trends, Networks, and Critical Th...
SECOND SEMESTER TOPIC COVERAGE SY 2023-2024 Trends, Networks, and Critical Th...SECOND SEMESTER TOPIC COVERAGE SY 2023-2024 Trends, Networks, and Critical Th...
SECOND SEMESTER TOPIC COVERAGE SY 2023-2024 Trends, Networks, and Critical Th...KokoStevan
 
microwave assisted reaction. General introduction
microwave assisted reaction. General introductionmicrowave assisted reaction. General introduction
microwave assisted reaction. General introductionMaksud Ahmed
 
Russian Escort Service in Delhi 11k Hotel Foreigner Russian Call Girls in Delhi
Russian Escort Service in Delhi 11k Hotel Foreigner Russian Call Girls in DelhiRussian Escort Service in Delhi 11k Hotel Foreigner Russian Call Girls in Delhi
Russian Escort Service in Delhi 11k Hotel Foreigner Russian Call Girls in Delhikauryashika82
 
Unit-IV- Pharma. Marketing Channels.pptx
Unit-IV- Pharma. Marketing Channels.pptxUnit-IV- Pharma. Marketing Channels.pptx
Unit-IV- Pharma. Marketing Channels.pptxVishalSingh1417
 
1029-Danh muc Sach Giao Khoa khoi 6.pdf
1029-Danh muc Sach Giao Khoa khoi 6.pdf1029-Danh muc Sach Giao Khoa khoi 6.pdf
1029-Danh muc Sach Giao Khoa khoi 6.pdfQucHHunhnh
 
Measures of Dispersion and Variability: Range, QD, AD and SD
Measures of Dispersion and Variability: Range, QD, AD and SDMeasures of Dispersion and Variability: Range, QD, AD and SD
Measures of Dispersion and Variability: Range, QD, AD and SDThiyagu K
 
SOCIAL AND HISTORICAL CONTEXT - LFTVD.pptx
SOCIAL AND HISTORICAL CONTEXT - LFTVD.pptxSOCIAL AND HISTORICAL CONTEXT - LFTVD.pptx
SOCIAL AND HISTORICAL CONTEXT - LFTVD.pptxiammrhaywood
 
Advanced Views - Calendar View in Odoo 17
Advanced Views - Calendar View in Odoo 17Advanced Views - Calendar View in Odoo 17
Advanced Views - Calendar View in Odoo 17Celine George
 
Mixin Classes in Odoo 17 How to Extend Models Using Mixin Classes
Mixin Classes in Odoo 17 How to Extend Models Using Mixin ClassesMixin Classes in Odoo 17 How to Extend Models Using Mixin Classes
Mixin Classes in Odoo 17 How to Extend Models Using Mixin ClassesCeline George
 
Gardella_PRCampaignConclusion Pitch Letter
Gardella_PRCampaignConclusion Pitch LetterGardella_PRCampaignConclusion Pitch Letter
Gardella_PRCampaignConclusion Pitch LetterMateoGardella
 
Key note speaker Neum_Admir Softic_ENG.pdf
Key note speaker Neum_Admir Softic_ENG.pdfKey note speaker Neum_Admir Softic_ENG.pdf
Key note speaker Neum_Admir Softic_ENG.pdfAdmir Softic
 
How to Give a Domain for a Field in Odoo 17
How to Give a Domain for a Field in Odoo 17How to Give a Domain for a Field in Odoo 17
How to Give a Domain for a Field in Odoo 17Celine George
 
Ecological Succession. ( ECOSYSTEM, B. Pharmacy, 1st Year, Sem-II, Environmen...
Ecological Succession. ( ECOSYSTEM, B. Pharmacy, 1st Year, Sem-II, Environmen...Ecological Succession. ( ECOSYSTEM, B. Pharmacy, 1st Year, Sem-II, Environmen...
Ecological Succession. ( ECOSYSTEM, B. Pharmacy, 1st Year, Sem-II, Environmen...Shubhangi Sonawane
 
Making and Justifying Mathematical Decisions.pdf
Making and Justifying Mathematical Decisions.pdfMaking and Justifying Mathematical Decisions.pdf
Making and Justifying Mathematical Decisions.pdfChris Hunter
 
PROCESS RECORDING FORMAT.docx
PROCESS RECORDING FORMAT.docxPROCESS RECORDING FORMAT.docx
PROCESS RECORDING FORMAT.docxPoojaSen20
 
Introduction to Nonprofit Accounting: The Basics
Introduction to Nonprofit Accounting: The BasicsIntroduction to Nonprofit Accounting: The Basics
Introduction to Nonprofit Accounting: The BasicsTechSoup
 

Recently uploaded (20)

SECOND SEMESTER TOPIC COVERAGE SY 2023-2024 Trends, Networks, and Critical Th...
SECOND SEMESTER TOPIC COVERAGE SY 2023-2024 Trends, Networks, and Critical Th...SECOND SEMESTER TOPIC COVERAGE SY 2023-2024 Trends, Networks, and Critical Th...
SECOND SEMESTER TOPIC COVERAGE SY 2023-2024 Trends, Networks, and Critical Th...
 
microwave assisted reaction. General introduction
microwave assisted reaction. General introductionmicrowave assisted reaction. General introduction
microwave assisted reaction. General introduction
 
INDIA QUIZ 2024 RLAC DELHI UNIVERSITY.pptx
INDIA QUIZ 2024 RLAC DELHI UNIVERSITY.pptxINDIA QUIZ 2024 RLAC DELHI UNIVERSITY.pptx
INDIA QUIZ 2024 RLAC DELHI UNIVERSITY.pptx
 
Russian Escort Service in Delhi 11k Hotel Foreigner Russian Call Girls in Delhi
Russian Escort Service in Delhi 11k Hotel Foreigner Russian Call Girls in DelhiRussian Escort Service in Delhi 11k Hotel Foreigner Russian Call Girls in Delhi
Russian Escort Service in Delhi 11k Hotel Foreigner Russian Call Girls in Delhi
 
Mattingly "AI & Prompt Design: Structured Data, Assistants, & RAG"
Mattingly "AI & Prompt Design: Structured Data, Assistants, & RAG"Mattingly "AI & Prompt Design: Structured Data, Assistants, & RAG"
Mattingly "AI & Prompt Design: Structured Data, Assistants, & RAG"
 
Unit-IV- Pharma. Marketing Channels.pptx
Unit-IV- Pharma. Marketing Channels.pptxUnit-IV- Pharma. Marketing Channels.pptx
Unit-IV- Pharma. Marketing Channels.pptx
 
1029-Danh muc Sach Giao Khoa khoi 6.pdf
1029-Danh muc Sach Giao Khoa khoi 6.pdf1029-Danh muc Sach Giao Khoa khoi 6.pdf
1029-Danh muc Sach Giao Khoa khoi 6.pdf
 
Measures of Dispersion and Variability: Range, QD, AD and SD
Measures of Dispersion and Variability: Range, QD, AD and SDMeasures of Dispersion and Variability: Range, QD, AD and SD
Measures of Dispersion and Variability: Range, QD, AD and SD
 
SOCIAL AND HISTORICAL CONTEXT - LFTVD.pptx
SOCIAL AND HISTORICAL CONTEXT - LFTVD.pptxSOCIAL AND HISTORICAL CONTEXT - LFTVD.pptx
SOCIAL AND HISTORICAL CONTEXT - LFTVD.pptx
 
Advanced Views - Calendar View in Odoo 17
Advanced Views - Calendar View in Odoo 17Advanced Views - Calendar View in Odoo 17
Advanced Views - Calendar View in Odoo 17
 
Mixin Classes in Odoo 17 How to Extend Models Using Mixin Classes
Mixin Classes in Odoo 17 How to Extend Models Using Mixin ClassesMixin Classes in Odoo 17 How to Extend Models Using Mixin Classes
Mixin Classes in Odoo 17 How to Extend Models Using Mixin Classes
 
Advance Mobile Application Development class 07
Advance Mobile Application Development class 07Advance Mobile Application Development class 07
Advance Mobile Application Development class 07
 
Mehran University Newsletter Vol-X, Issue-I, 2024
Mehran University Newsletter Vol-X, Issue-I, 2024Mehran University Newsletter Vol-X, Issue-I, 2024
Mehran University Newsletter Vol-X, Issue-I, 2024
 
Gardella_PRCampaignConclusion Pitch Letter
Gardella_PRCampaignConclusion Pitch LetterGardella_PRCampaignConclusion Pitch Letter
Gardella_PRCampaignConclusion Pitch Letter
 
Key note speaker Neum_Admir Softic_ENG.pdf
Key note speaker Neum_Admir Softic_ENG.pdfKey note speaker Neum_Admir Softic_ENG.pdf
Key note speaker Neum_Admir Softic_ENG.pdf
 
How to Give a Domain for a Field in Odoo 17
How to Give a Domain for a Field in Odoo 17How to Give a Domain for a Field in Odoo 17
How to Give a Domain for a Field in Odoo 17
 
Ecological Succession. ( ECOSYSTEM, B. Pharmacy, 1st Year, Sem-II, Environmen...
Ecological Succession. ( ECOSYSTEM, B. Pharmacy, 1st Year, Sem-II, Environmen...Ecological Succession. ( ECOSYSTEM, B. Pharmacy, 1st Year, Sem-II, Environmen...
Ecological Succession. ( ECOSYSTEM, B. Pharmacy, 1st Year, Sem-II, Environmen...
 
Making and Justifying Mathematical Decisions.pdf
Making and Justifying Mathematical Decisions.pdfMaking and Justifying Mathematical Decisions.pdf
Making and Justifying Mathematical Decisions.pdf
 
PROCESS RECORDING FORMAT.docx
PROCESS RECORDING FORMAT.docxPROCESS RECORDING FORMAT.docx
PROCESS RECORDING FORMAT.docx
 
Introduction to Nonprofit Accounting: The Basics
Introduction to Nonprofit Accounting: The BasicsIntroduction to Nonprofit Accounting: The Basics
Introduction to Nonprofit Accounting: The Basics
 

Accounts receivable & cash balances

  • 1. AUDITING CHAPTER 11 Accounts Receivable & Cash Balances By David N. Ricchiute
  • 2. REVENUE/RECEIPT CYCLE Relationship assertions & audit procedures Relationship audit risk, client strategies, substantive tests Substantive tests for assertions Revenue recognition, earnings manipulation, & channel stuffing Audit sampling & accounts receivable 2 Computer-assisted audit techniques GBW 8th ed. Ch. 11
  • 3. ASSERTIONS & OBJECTIVES Management assertions: Recorded receivables & cash balances  Exist  Include all transactions (completeness)  Represent rights of entity  Are valued appropriately  Are presented & disclosed properly 3 GBW 8th ed. Ch. 11
  • 4. OBJECTIVES & PROCEDURES: Existence/Occurrence Objective: determine whether all recorded sales, receivables, cash balances Procedures  Existence  Physical observation  Confirmation  Transactions occurred  Cutoff testing for proper period 4 GBW 8th ed. Ch. 11
  • 5. OBJECTIVES & PROCEDURES: Completeness Objective: determine whether all receivables, sales, cash of period are presented in financial statements Procedures  Examine documents  Apply analytical procedures  Cutoff bank statements, bank reconciliations, etc. 5 GBW 8th ed. Ch. 11
  • 6. OBJECTIVES & PROCEDURES: Rights/Obligations Objective: determine whether entity has property rights to cash, accounts receivable Procedures  Examine documentation  Confirmations  Inquiries 6 GBW 8th ed. Ch. 11
  • 7. OBJECTIVES & PROCEDURES: Valuation, Allocation Objective: determine whether entity has recorded items in correct amounts, accounts, & time periods Procedures  Confirm balances  Verify mathematical accuracy  Examine details of recording 7 GBW 8th ed. Ch. 11
  • 8. OBJECTIVES & PROCEDURES: Presentation, Disclosure Objective: determine whether recorded transactions, balances properly classified, described, disclosed Procedures  Compare presentation to GAAP  Annual updates of AICPA guidelines 8 GBW 8th ed. Ch. 11
  • 9. AUDIT RISK MODEL AR = CR x IR x DR Detection risk (DR): likelihood that error could occur & not be detected Based on  Control risk (CR)  Likelihood of material error  Inherent risk (IR)  Strategies & threats 9 GBW 8th ed. Ch. 11
  • 10. DETECTION RISK DR = ____AR___ IR x CR Nature, extent, timing substantive tests  Nature: more/less persuasive tests  Extent: larger/smaller samples  Timing: balance sheet date or interim 10 GBW 8th ed. Ch. 11
  • 11. ASSERTIONS & PROCEDURES Accounts Receivable, Sales-1 Valuation Verify mathematical accuracy AR  Obtain aged trial balance  Foot trial balance  Compare total AR per trial balance to general ledger 11 GBW 8th ed. Ch. 11
  • 12. ASSERTIONS & PROCEDURES Accounts Receivable, Sales-2 Existence, rights, valuation Confirm year-end accounts & notes receivable with debtors  Positive: tell auditor if balance correct  Large balances, inaccuracies  Negative: tell auditor only if balance incorrect  Control adequate, small balances 12 GBW 8th ed. Ch. 11
  • 13. ASSERTIONS & PROCEDURES Accounts Receivable, Sales-3 Existence or occurrence, completeness Test cutoff to determine whether sales, receivables recorded in proper period  FOB shipping point  FOB destination 13 GBW 8th ed. Ch. 11
  • 14. ASSERTIONS & PROCEDURES Accounts Receivable, Sales-4 Valuation, rights Review collectibility receivables Determine adequacy allowance for doubtful accounts 14 GBW 8th ed. Ch. 11
  • 15. ASSERTIONS & PROCEDURES Accounts Receivable, Sales-5 Existence or occurrence, completeness, valuation Perform analytical procedures for reasonableness of sales, receivables balances  Collections problems  Overstated sales  Understated sales 15 GBW 8th ed. Ch. 11
  • 16. ASSERTIONS & PROCEDURES Accounts Receivable, Sales-6 Presentation & disclosure Review financial statements to determine  Accounts, notes receivable properly classified, described  Disclosures adequate 16 GBW 8th ed. Ch. 11
  • 17. TESTING CUTOFF Sales, Receivables At or around end each quarter, the former President directed his subordinates to hold IGI’s books open, to backdate invoices, shipping documents. This caused IGI to record out-of-period sales & to overstate revenue, net income end each quarter. Procedures  Trace recorded sales to shipping documents before, after end of period 17 GBW 8th ed. Ch. 11
  • 18. ASSERTIONS & PROCEDURES: Cash-1 Existence, rights, valuation Confirm year end balances with all banks 18 GBW 8th ed. Ch. 11
  • 19. ASSERTIONS & PROCEDURES: Cash-2 Valuation Verify mathematical accuracy recorded cash balances  Foot cash journals  Trace totals to general ledger, year-end bank reconciliations  Test cash on hand 19 GBW 8th ed. Ch. 11
  • 20. ASSERTIONS & PROCEDURES: Cash-3 Existence, completeness, valuation Test cutoff  Obtain cutoff bank statement  Verify accuracy  Examine & trace to bank reconciliations & cash journals  Proof of cash  Reconcile recorded cash with bank confirmation  Examine interbank, intercompany transfers 20 GBW 8th ed. Ch. 11
  • 21. ASSERTIONS & PROCEDURES: Cash-4 Presentation & disclosure Review financial statements to determine  Cash balances properly classified, described  Disclosures adequate 21 GBW 8th ed. Ch. 11
  • 22. TESTING CUTOFF FOR CASH Reconcile internal documents  Cash journals  General ledger  Bank reconciliations With external documents  Year-end bank statement  Cutoff bank statements  Bank confirmations 22 GBW 8th ed. Ch. 11
  • 23. REVENUE RECOGNITION & EARNINGS MANIPULATION Increasingly, I have become concerned that the motivation to meet Wall Street earnings expectations may be overriding common sense business practices. Arthur Levitt, Jr., “The ‘Numbers Game.” Speech NYU, 1998. 23 GBW 8th ed. Ch. 11
  • 24. REVENUE RECOGNITION SAB 104 Criteria  Persuasive evidence of arrangement exists  Delivery has occurred or services rendered  Seller’s price fixed or determinable  Collectibility reasonably assured 24 GBW 8th ed. Ch. 11
  • 25. COMMON MEANS TO MANIPULATE EARNINGS - 1 Method Revenue Recognition Error Bill & hold Shipments to 3rd party warehouses Cancelled orders Cancelled, duplicate orders Conditional sales Before contingencies resolved Consignment sales Goods on consignment, trial Continuing Seller involved after delivery, e.g., involvement installation Improper cutoff Before title, risk ownership passed 25 GBW 8th ed. Ch. 11
  • 26. COMMON MEANS TO MANIPULATE EARNINGS - 2 Method Revenue Recognition Error Kickback sales Inflated selling price for kickback Overstated Inflated % completion on construction completion projects Partial shipments Not all goods ordered are shipped Pre-invoicing Goods still in production Premature Goods ordered but not authorized for shipment shipment 26 GBW 8th ed. Ch. 11
  • 27. COMMON MEANS TO MANIPULATE EARNINGS - 3 Method Revenue Recognition Error Premature sales Goods ordered but not shipped Sham sales False shipments Side agreements To forestall completion earnings process Uncertain Seller’s performance uncertain performance Collection uncertain, unlikely Uncertain realization Unauthorized Shipments not authorized shipment 27 GBW 8th ed. Ch. 11
  • 28. MANIPULATED EARNINGS Channel Stuffing Definition: incentives to induce incremental demand Examples  Bausch & Lomb  Told distributors to buy large amount of inventory to maintain distributorship  B&L recognized extra $22 million  Sunbeam  Used price discounting to encourage customers to hold 80 weeks of inventory 28 GBW 8th ed. Ch. 11
  • 29. MANIPULATED EARNINGS Asset Swaps Definition: companies trading right to use others asset Examples  Global Crossing  Treated underseas cables as real estate  Recognized revenue by treating swap as sale 29 GBW 8th ed. Ch. 11
  • 30. MANIPULATED EARNINGS Other Improper expense capitalization  Chambers Development  Capitalized landfill expenses after determining earnings necessary to meet analysts expectations  MicroStrategy  Recognized revenue before all services provided for software sales 30 GBW 8th ed. Ch. 11
  • 31. ACCOUNTS RECEIVABLE Update assessment of control risk Planning confirmations & selecting plan  Identify population, sampling unit, anticipated error  Estimate tolerable error & risk incorrect acceptance  Calculate sample size  Choose sample selection method  Evaluate results 31 GBW 8th ed. Ch. 11
  • 32. COMPUTER ASSISTED TESTS: AR Accuracy Foot, crossfoot recorded amounts within master file Total balances Display/print exceptions 32 GBW 8th ed. Ch. 11
  • 33. COMPUTER ASSISTED TESTS: AR Aging Trace individual balances from master file to sales journal Classify balances by invoice dates/age Display/print aged trial balances 33 GBW 8th ed. Ch. 11
  • 34. COMPUTER ASSISTED TESTS: AR Credit Balances Scan master receivables file for net credit balances Display/print listing credit balance accounts 34 GBW 8th ed. Ch. 11