Completing the tests in the sales and collection cycle accounts receivable

1. Completing the Tests in the
Sales and Collection Cycle:
Accounts Receivable
Chapter 15
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2. Accounts Receivable Balance-
Related Audit Objectives
Detail tie-in
Accuracy
Existence Classification
Completeness
Cutoff
Realizable
value
Rights and
obligations
Presentation
and disclosure
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3. Methodology for Designing Tests
of
Balances – 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.
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4. Methodology for Designing Tests
of
Balances – 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.
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5. Methodology for Designing Tests
of
Balances – Accounts Receivable
Design tests of details of
accounts receivable balance
to satisfy balance-related
audit objectives.
Audit procedures
Sample size
Items to select
Timing
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6. Analytical Procedures for the
Sales and Collection Cycle
Gross margin percentage with previous years
Sales by month over time
Sales returns and allowances as a percentage
of gross sales with previous years
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7. Analytical Procedures for the
Sales and Collection Cycle
Individual customer balances over a stated amount
Bad debt expense as a percentage of gross sales
Days that accounts receivable are outstanding
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8. Analytical Procedures for the
Sales and Collection Cycle
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
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9. Designing Tests of
Detail of Balances
Aged trial balance
Recorded accounts receivable exist
Existing accounts receivable are included
Accounts receivable are accurate
Accounts receivable are properly classified
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10. Designing Tests of
Detail 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
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11. 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
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12. 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.
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13. Type of Confirmation
Positive confirmation – confirm the printed
Positive confirmation – confirm the printed
balance on the confirmation
balance on the confirmation
Blank confirmation form – requests customer to
fill in balance amount on the confirmation
Blank confirmation form – requests customer to
fill in balance amount on the confirmation
Invoice confirmation – confirm one or more
Invoice confirmation – confirm one or more
invoices Instead of the total balance
invoices Instead of the total balance
Negative confirmation – respond only if balance
Negative confirmation – respond only if balance
is incorrect
is incorrect
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14. 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.
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15. Sample Size
Tolerable misstatement
Inherent risk
Control risk
Achieved detection risk from
other substantive tests
Type of confirmation
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16. Selection of Items
for 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.
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17. Selection of Items
for 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.
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18. 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
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19. 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.
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20. 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.
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21. Shipping Documents
These are important in establishing
whether the shipment was actually
made and as a test of cutoff.
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22. Correspondence
With 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.
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23. Drawing Conclusions
Reevaluate internal control.
Evaluate the qualitative nature of misstatements.
Determine whether sufficient evidence was obtained.
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24. End of Chapter 15
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