Completing the Tests in the Sales and Collection Cycle ... · in the Sales and Collection Cycle:...

Completing the Tests in the Sales and Collection Cycle:

Accounts Receivable

Chapter 16

Learning Objective 1

Describe the methodology for designing tests of details of balances using the audit

risk model.

Accounts Receivable Balance-related Audit Objectives

Cutoff

Detail tie-in

Existence Rights

Accuracy

Classification

Objectives

Realizable value Completeness

Methodology for Designing Tests of Details of Balances for A/R

Phase I

Set tolerable misstatement and assess

inherent risk for accounts receivable

Identify client business risks

affecting Accounts

Receivable

Assess control risk for sales

and collection

Phase II

Design and perform tests of controls and substantive tests of transactions for the sales and collection cycle

Phase III

Sample size

Design and perform analytical

procedures for accounts receivable

Design tests of details of accounts receivable

balance to satisfy balance-related

objectives

Audit procedures

Items to select

Timing

Relationship Between Sales and Accounts Receivable

ACCOUNTS RECEIVABLE BALANCE-RELATED AUDIT OBJECTIVES

Translation-related audit objectives

Occurrence

Completeness

Accuracy

Posting and summarization

Classification

Timing

Relationship Between Sales and Accounts Receivable

ACCOUNTS RECEIVABLE BALANCE-RELATED AUDIT OBJECTIVES

Translation-related audit objectives

Cash receipts

Occurrence

Completeness

Accuracy

Posting and summarization

Classification

Timing

Design and perform analytical procedures for accounts in the sales and collection cycle.

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

Compare by product line:

Individual customer balances over a stated amount

Bad debt expense as a percentage of gross sales

Days that accounts receivable are outstanding

Compare with previous years:

Aging category as a percentage of receivables

Allowance for uncollectible accounts as a percentage of accounts receivable

Write-off of uncollectible accounts as a percentage of total accounts receivable

Compare with previous years:

Selected Comparative Information

Sales Gross margin Accounts receivable Bad debt expense Total current assets Total assets Net earnings Number of accounts receivable Number of accts. rec. with balances over $100,000

144,328 39,845 20,197 3,323 51,027 61,367 5,681

9.0 9.6 7.3

(2.1) 14.0 (7.0) 21.9

132,421 36,350 18,827 3,394 44,779 66,021 4,659

7.0 7.0 14.1 7.3 6.6 8.0 39.0

123,737 33,961 16,505 3,162 41,989 61,147 3,351

12/31/11 ($000)

Percent change 2010-11

12/31/10 ($000)

Percent change 2009- 2010

12/31/09 ($000)

Analytical Procedures: Sales and Collection Cycle

Design and Perform Tests of Details of A/R Balance (Phase III)

Planned detection risk for each objective is an auditor decision Combining the factors that determine planned detection risk is complex

Design and perform tests of details of balances for accounts receivable.

Designing Tests of Detail of Balances

Accounts receivable are correctly added and agree with the Master File and the General Ledger (aged trial balance).

Recorded accounts receivable exist

Existing accounts receivable are included

Accounts receivable are accurate Accounts receivable are properly classified Cutoff for accounts receivable is correct

Accounts receivable is stated at realizable value The client has rights to accounts receivable Accounts receivable presentation and disclosure

Obtain and evaluate accounts receivable confirmations.

Confirmation Requirements

Auditing Standards

United States International

Required Except when:

Low inherent & control risks

Expected low response rate

Confirmations not required

Alternate Procedures

Type of Confirmation

Positive confirmation Blank confirmation form

Invoice confirmation

Negative confirmation

Positive Confirmation

Negative Confirmation Requirements

Risk of material misstatement is low Large number of small account balances

Expected low exception rate

Expect adequate consideration from recipients

Negative Confirmation

Timing

The most reliable evidence from confirmations is obtained when they are sent as close to the balance sheet date as possible.

Sampling Decisions

Achieved Detection risk from

other tests

Tolerable misstatement

Inherent Risk

Type of Confirmation

Sample

Size factors

Control Risk

Verifying Addresses and Maintaining Control

The auditor should perform procedures to verify the addresses or email addresses used for confirmation.

Auditors must be responsible for mailing the confirmations and maintaining control of the confirmations until they are returned from the customer.

Follow-up on Nonresponses

When positive confirmations are used, AU 330 requires follow-up procedures for confirmations not returned by the customer.

Alternate Procedures

Duplicate sales invoices

Subsequent cash receipts

Shipping documents

Analysis of Differences

Payment-in-transit Shipment-in-transit

The goods have been returned

Errors and disputes

Drawing Conclusions

Reevaluate internal control Evaluate the qualitative nature of misstatements Determine whether sufficient evidence was obtained

Design audit procedures for the audit of accounts receivable, using an evidence planning worksheet as a guide.

Evidence Planning Worksheet

End of Chapter 16

Completing the Tests in the Sales and Collection Cycle ... · in the Sales and Collection Cycle:...

Documents

Completing the Tests in the Sales and Collection Cycle:

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