14 - 1Copyright 2003 Pearson Education Canada Inc.

CHAPTER 14 Completing the

Tests in the Sales and Collection

Cycle: Accounts Receivable

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An An aged trial balanceaged trial balance is the basis for is the basis for many tests of A/R and the allowance many tests of A/R and the allowance

for uncollectible accounts.for uncollectible accounts. 12/31/04 AGE, BASED ON INVOICE DATECUSTOMER BALANCE 0 -30 31-60 61-90 OVER 90AKINC 1276 170 1106BOWERS 534 534DEWASTALI 7523 7100 423DUNKLEBURG 97 97EASLEY 23000 21000 2000 EWING 8969 8969GOHO 1500 1500HARRISON 56900 56900MCCRAY 6500 6500 106299 30304 3203 6923 65869

14 - 3Copyright 2003 Pearson Education Canada Inc.

??GAAS GAAS requires requires confirmation confirmation

of a sample of a/r of a sample of a/r unlessunless::

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GAAS GAAS requires requires confirmation confirmation of a sample of a/r of a sample of a/r unlessunless::

- combined IR & CR is low

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GAAS GAAS requires requires confirmation confirmation of a sample of a/r of a sample of a/r unlessunless::

- combined IR & CR is low- use of confirmations would be ineffective

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A/R confirmations are A/R confirmations are effective in discovering:effective in discovering:

??

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A/R confirmations are A/R confirmations are effective in discovering:effective in discovering:

- fictitious accounts (existence)

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A/R confirmations are A/R confirmations are effective in discovering:effective in discovering:- fictitious accounts (existence)- incorrect amounts (accuracy)

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A/R confirmations A/R confirmations may may help in discovering:help in discovering:

- uncollectibles

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A/R confirmations are A/R confirmations are notnot effective in discovering:effective in discovering:

??

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omitted accounts (completeness)

A/R confirmations are A/R confirmations are notnot effective in discovering:effective in discovering:

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Why might a client Why might a client intentionally omitintentionally omit some a/r? some a/r?

12/31/04 AGE, BASED ON INVOICE DATECUSTOMER BALANCE 0 -30 31-60 61-90 OVER 90AKINC 1276 170 1106BOWERS 534 534DEWASTALI 7523 7100 423DUNKLEBURG 97 97

EWING 8969 8969GOHO 1500 1500

MCCRAY 6500 6500?

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Why might a client Why might a client intentionally omitintentionally omit some a/r? some a/r?

The client may not wish to disclose a/r

of related parties.

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A/R confirmations may be A/R confirmations may be either either positivepositive or or negativenegative. .

What is the difference?What is the difference?

+ -

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A/R confirmations may be A/R confirmations may be either either positivepositive or or negativenegative. .

What is the difference?What is the difference?

Negative confirmations request a re-sponse only if the debtor believes thatthe amount printed on the confirmationis incorrect.

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A/R confirmations may be A/R confirmations may be either either positivepositive or or negativenegative. .

What is the difference?What is the difference?Negative confirmations request a re-sponse only if the debtor believes thatthe amount printed on the confirmationis incorrect.Positive confirmations request that thedebtor respond whether or not the bal-ance is correct or they ask the debtor toindicate the amount owed at a certain date.

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Which form of A/R Which form of A/R confirmation is more confirmation is more reliablereliable, ,

positive or negative?positive or negative?

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Which form of A/R confirmation is Which form of A/R confirmation is more more reliablereliable, positive or negative?, positive or negative?

A nonresponse to a positive confirmation is investigated.

morereliable

A nonresponse to a negative confirmationis assumed to signify debtor agreementwith client balance. This may be anerroneous assumption. Why?

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Which form of A/R confirmation is more Which form of A/R confirmation is more expensiveexpensive, positive or negative?, positive or negative?

+ -

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Which form of A/R confirmation is more Which form of A/R confirmation is more expensiveexpensive, positive or negative?, positive or negative?

Positive confirmations are more expensivebecause they require more return postage and follow-up procedures if they are not returned.All positive confirmations should be returned;negative confirmations are returned only ifamounts are disputed.

Auditor

Client Customer

paid byauditor

Canada 48

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In deciding whether to use In deciding whether to use positive or negative positive or negative

confirmations, consider:confirmations, consider:

??

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In deciding whether to use In deciding whether to use positive or negative positive or negative

confirmations, consider:confirmations, consider:- prior experience with client, industry- nature of information being confirmed- appropriate respondents- effectiveness of internal controls- number of account balances and debtors

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What is the preferable What is the preferable timingtiming for for confirmation procedures?confirmation procedures?

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What is the preferable What is the preferable timingtiming for for confirmation procedures?confirmation procedures?

the balance sheet date WHY?

December

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Could confirmation procedures Could confirmation procedures occur during occur during interim testinginterim testing??

October

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Yes, if the internalcontrols after theinterim date are

consideredadequate.

Could confirmation procedures Could confirmation procedures occur during occur during interim testinginterim testing??

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Confirmation SequenceConfirmation Sequence

what’sfirst?

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12/31/04 AGE, BASED ON INVOICE DATECUSTOMER BALANCE 0 -30 31-60 61-90 OVER 90AKINC 1276 170 1106BOWERS 534 534DEWASTALI 7523 7100 423DUNKLEBURG 97 97EASLEY 23000 21000 2000 EWING 8969 8969GOHO 1500 1500HARRISON 56900 56900MCCRAY 6500 6500 106299 30304 3203 6923 65869

Confirmation SequenceConfirmation Sequence

obtaina/r aging

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12/31/04 AGE, BASED ON INVOICE DATECUSTOMER BALANCE 0 -30 31-60 61-90 OVER 90AKINC 1276 170 1106BOWERS 534 534DEWASTALI 7523 7100 423DUNKLEBURG 97 97EASLEY 23000 21000 2000 EWING 8969 8969GOHO 1500 1500HARRISON 56900 56900MCCRAY 6500 6500 106299 30304 3203 6923 65869

Confirmation SequenceConfirmation Sequence

obtaina/r aging

selectspecific

a/r forconfirma-

tion

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Confirmation SequenceConfirmation Sequence

obtaina/r aging

selectspecific

a/r forconfirma-

tion

how?-judgmentally?-statistically?-client involvement?

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Confirmation SequenceConfirmation Sequence

obtaina/r aging

selectspecific

a/r forconfirma-

tion

print confirmations and mail them

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Confirmation SequenceConfirmation Sequence

obtaina/r aging

selectspecific

a/r forconfirma-

tion

print confirmations and mail them

analyzeresults,

investigatedisputedamounts

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Confirmation SequenceConfirmation Sequence

What if the response rateWhat if the response rateis is unacceptably lowunacceptably low??

obtaina/r aging

selectspecific

a/r forconfirma-

tion

print confirmations and mail them

analyzeresults,

investigatedisputedamounts

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Confirmation SequenceConfirmation Sequence

What if the response rateWhat if the response rateis is unacceptably lowunacceptably low??

obtaina/r aging

selectspecific

a/r forconfirma-

tion

print confirmations and mail them

analyzeresults,

investigatedisputedamounts

Consider the cost/benefitof a second mailing.

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Confirmation SequenceConfirmation Sequence

What if the response rate What if the response rate for the for the second mailingsecond mailing is is

unacceptably low?unacceptably low?

obtaina/r aging

selectspecific

a/r forconfirma-

tion

print confirmations and mail them

analyzeresults,

investigatedisputedamounts

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Confirmation SequenceConfirmation Sequence

What if the response rate What if the response rate for the for the second mailingsecond mailing is is

unacceptably low?unacceptably low?

obtaina/r aging

selectspecific

a/r forconfirma-

tion

print confirmations and mail them

analyzeresults,

investigatedisputedamounts

Consider the cost/benefitof a third mailing.

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Confirmation SequenceConfirmation Sequence

obtaina/r aging

selectspecific

a/r forconfirma-

tion

print confirmations and mail them

analyzeresults,

investigatedisputedamounts

What if the response rate What if the response rate for allfor allmailingsmailings is unacceptably low? is unacceptably low?

14 - 38Copyright 2003 Pearson Education Canada Inc.

Confirmation SequenceConfirmation Sequence obtaina/r aging

selectspecific

a/r forconfirma-

tion

print confirmations and mail them

analyzeresults,

investigatedisputedamounts

What if the response rate What if the response rate for allfor allmailingsmailings is unacceptably low? is unacceptably low?

Use alternative proceduresto determine existence and

accuracy of a/r or:

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Confirmation SequenceConfirmation Sequence obtaina/r aging

selectspecific

a/r forconfirma-

tion

print confirmations and mail them

analyzeresults,

investigatedisputedamounts

What if the response rate What if the response rate for allfor allmailingsmailings is unacceptably low? is unacceptably low?

Treat the non-response as an error to be projected to the

population

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ideas?ideas?

Use alternative proceduresto determine existence and

accuracy of a/r.

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- examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r

Use alternative proceduresto determine existence and

accuracy of a/r.

Pace Corporation 324

$

Bank of Montreal

pay to the order of

date

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- examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r- examine bills of lading and shipping documentation

Use alternative proceduresto determine existence and

accuracy of a/r.

ACE

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- examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r- examine bills of lading and shipping documentation- examine sales invoices

Use alternative proceduresto determine existence and

accuracy of a/r.

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- examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r- examine bills of lading and shipping documentation- examine sales invoices- examine client correspondence

Use alternative proceduresto determine existence and

accuracy of a/r.

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- examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r- examine bills of lading and shipping documentation- examine sales invoices- examine client correspondence

Which of these procedures Which of these procedures has the greatest reliability?has the greatest reliability?

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those involving third parties

- examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r- examine bills of lading and shipping documentation- examine sales invoices- examine client correspondence

Which of these procedures has the Which of these procedures has the greatest reliability?greatest reliability?

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Dear auditor:

We received yourconfirmation dated1/30. Unfortunate-ly, our bookkeepingsystem does not allow us to confirmany balances otherthan the currentbalance. SORRY! Client Customer

What if the What if the auditor auditor

receives a receives a response response

similar to this?similar to this?

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What if the What if the auditor auditor

receives a receives a response response

similar to this?similar to this?

Dear auditor:

We received yourconfirmation dated1/30. Unfortunate-ly, our bookkeepingsystem does not allow us to confirmany balances otherthan the currentbalance. SORRY! Client Customer

- contact customer and encourage a satisfactory response

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What if the What if the auditor auditor

receives a receives a response response

similar to this?similar to this?

Dear auditor:

We received yourconfirmation dated1/30. Unfortunate-ly, our bookkeepingsystem does not allow us to confirmany balances otherthan the currentbalance. SORRY! Client Customer

- contact customer and encourage a satisfactory response- consider alternative procedures

14 - 50Copyright 2003 Pearson Education Canada Inc.

What if the What if the auditor auditor

receives a receives a response response

similar to this?similar to this?

Dear auditor:

We received yourconfirmation dated1/30. Unfortunate-ly, our bookkeepingsystem does not allow us to confirmany balances otherthan the currentbalance. SORRY! Client Customer

- contact customer and encourage a satisfactory response- consider alternative procedures- treat as error to be projected to the population

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Confirmation SequenceConfirmation Sequence

statistically and/or judgmentally determine whether the

extent of exceptions will affect internalcontrol evaluation and acceptability

of a/r balance

obtaina/r aging

selectspecific

a/r forconfirma-

tion

print confirmations and mail them

analyzeresults,

investigatedisputedamounts

14 - 52Copyright 2003 Pearson Education Canada Inc.

Receivables Audit ProceduresReceivables Audit Procedures- confirm a sample of a/r

14 - 53Copyright 2003 Pearson Education Canada Inc.

Receivables Audit ProceduresReceivables Audit Procedures- confirm a sample of a/r- inquire about third party claims to client receivables (e.g., pledging)

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Receivables Audit ProceduresReceivables Audit Procedures- confirm a sample of a/r- inquire about third party claims to client receivables (e.g., pledging)- perform analytical procedures on receivables and related accounts (sales, bad debt expense, allowance for uncollectible accts.)

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Receivables Audit ProceduresReceivables Audit Procedures- perform analytical procedures on receivables and related accounts- review year-end cutoff for sales. Examine all sales invoices and related shipping documents and cash receipts for several days before and after the balance sheet date.

Determine when titleto the goods passed.

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Receivables Audit ProceduresReceivables Audit Procedures- perform analytical procedures on receivables and related accounts- review year-end cutoff for sales- after reviewing a/r aging, discuss pos- sible a/r write-offs and the adequacy of the allowance with management

14 - 57Copyright 2003 Pearson Education Canada Inc.

Receivables Audit ProceduresReceivables Audit Procedures- perform analytical procedures on receivables and related accounts- review year-end cutoff for sales.- after reviewing a/r aging, discuss possible a/r write-offs and the adequacy of the allowance with management- inspect notes receivable

14 - 58Copyright 2003 Pearson Education Canada Inc.

Receivables Audit ProceduresReceivables Audit Procedures- perform analytical procedures on receivables and related accounts- review year-end cutoff for sales.- after reviewing a/r aging, discuss possible a/r write-offs and the adequacy of the allowance with management- inspect notes receivable- vouch a sample of a/r to customer order, sales order, sales invoice, shipping documents, cash receipts

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Receivables Audit ProceduresReceivables Audit Procedures- trace a sample of accounts from trial

balance to master file and vice versa

14 - 60Copyright 2003 Pearson Education Canada Inc.

Receivables Audit ProceduresReceivables Audit Procedures- trace a sample of accounts from trial

balance to master file and vice versa - foot trial balance and aging columns

14 - 61Copyright 2003 Pearson Education Canada Inc.

Receivables Audit ProceduresReceivables Audit Procedures- trace a sample of accounts from trial

balance to master file and vice versa - foot trial balance and aging columns- trace a/r trial balance/master file to

general ledger

14 - 62Copyright 2003 Pearson Education Canada Inc.

Receivables Audit ProceduresReceivables Audit Procedures- trace a sample of accounts from trial

balance to master file and vice versa - foot trial balance and aging columns- trace a/r trial balance/master file to

general ledger- review aged trial balance for related

party transactions

14 - 63Copyright 2003 Pearson Education Canada Inc.

Receivables Audit ProceduresReceivables Audit Procedures- trace a sample of accounts from trial

balance to master file and vice versa - foot trial balance and aging columns- trace a/r trial balance/master file to

general ledger- review aged trial balance for related

party transactions- inquire of management about related

party transactions, and likelihood of collecting older accounts.

14 - 64Copyright 2003 Pearson Education Canada Inc.

Receivables Audit ProceduresReceivables Audit Procedures- review sales returns and allowances

after balance sheet date

14 - 65Copyright 2003 Pearson Education Canada Inc.

Receivables Audit ProceduresReceivables Audit Procedures- review sales returns and allowances

after balance sheet date - trace a sample of accounts from aged

trial balance to a/r master file

14 - 66Copyright 2003 Pearson Education Canada Inc.

Receivables Audit ProceduresReceivables Audit Procedures- review sales returns and allowances

after balance sheet date - trace a sample of accounts from aged

trial balance to a/r master file- review of minutes of meetings