Chapter 16 PPTs.pdf

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

Accounts Receivable

Chapter 16Questions: 16-20 to 16-29, 16-31 to 16-33

16‐1

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Detail tie-in

A/RAudit

Objectives

Classification

Rights

Realizable value

Cutoff

Existence

Completeness

Accuracy


Phase I

Identify client business

risks affecting Accounts

Receivable

Set materiality and assess inherent risk for accounts receivable

Assess control risk for sales

and collection

cycle


Phase II

Design and perform tests of controls andsubstantive tests of transactionsfor the sales and collection cycle

(Chapter 14)


Phase III

Design and perform analytical procedures

for accounts receivable

Design tests of details of accounts receivable

balance to satisfy balance-related

objectives

Audit procedures

Sample size

Items to select

Timing

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Planned detection risk for each audit objective is an auditor decision

Determine planned detection risk is complex and subjective

Planned audit evidence is inversely related to planned detection risk.


• [Detail tie-in] Accounts receivable are correctly added and agree with the Master File and the General Ledger (aged trial balance).

• [existence] Recorded accounts receivable exist• Confirm AR• If no response, examine shipping documents and

evidence of subsequent cash receipts

• [completeness] Existing accounts receivable are included• Confirmation does NOT work• Shipment properly billed and recorded?—test of

details of transactions


[accuracy] Accounts receivable are accurate• Confirmation of AR tests for accuracy. • If no response, examine evidence of subsequent

cash receipts

[classification]Accounts receivable are properly classified• Note receivable• Dues from directors, officers, related parties• Relate to presentation and disclosure


[cutoff] Cutoff for accounts receivable is correct• Cutoff misstatements exist when current period transactions

are recorded in the subsequent period or vice versa.• Cutoff misstatement can occur for sales, sales returns

and allowances, and cash receipts. • The objective of cutoff test is to verify whether transaction

near the end of the accounting period are recorded in the proper period.

• Sales cutoff based on title transfer• Before shipment (custom manufacture)• Upon shipment (FOB shipping point)• Upon delivery/after shipment (FOB destination)• Test for sales cutoff: obtain the number for the last

shipment and compare it with this number with the current and subsequent period recorded sales.


Sales returns and allowance cutoff• GAAP requires sales returns and allowance cutoff to be matched

with the related sales if the amount is material. • [example] if current period shipments are returned in the

subsequent period, the sales return should appear in the current period. The returned goods should be treated as current period inventory.

• If immaterial, it is ok to record sales returns and allowances are recorded in the period when they occur, under the assumption that it is approximately equal, offsetting amounts at the beginning and end of each accounting period.

• Test for cutoff• Examine supporting documentation for a sample of sales

returns and allowances recorded during several weeks subsequent to the closing date to determine the date of the original sale.


Cash receipts cutoff

• Improper cutoff of cash affects only cash and AR, but NOT earning.

•Cash cutoff misstatement (holding the cash receipts book open)

•Test for cash receipt cutoff by tracing recording cash receipts to subsequent period bank deposit on the bank statement.

•Be aware of timing difference (not a cutoff problem) in payment in transit


[Valuation] Accounts receivable is stated at realizable value• The realizable value of accounts receivable equals gross

accounts receivable less the allowance for uncollectible accounts.

• The client will estimate the allowance for uncollectible accounts, but the auditor must evaluate whether the clients allowance is reasonable considering all available facts.

• Credit policy• Credit approval practice• Change in economic environment and sales volume

• Compare with previous years


[Rights and obligations] The client has rights to account receivables•Factor or sold at a discount•To uncover instances in which the client has limited rights to receivables, the auditor may review the minutes, discuss with the client, confirm with banks, examine debt contracts for evidence of accounts receivable pledged as collateral and examine correspondence files.

[Presentation and Disclosure] Accounts receivable presentation and disclosure•Test for presentations and disclosure related audit objectives are generally done as part of the completion phase of the audit. •Mandatory disclosure related to AR include

• Receivables from directors, officers, and related parties. • AR factoring or collateral.


AR confirmation Required Except when:

Expected low response rate

Low inherent & control risks

Alternate Procedures

Account Receivable Confirmation


Positive confirmation• A positive confirmation is a communication addressed to the debtor requesting

the recipient to confirm directly whether the balance as stated on the confirmation is correct or incorrect.

Blank confirmation form (type of positive confirmation)• A blank confirmation is a type of positive confirmation that does not state the

amount on the confirmation but request the recipient to fill in the balance or furnish other information.

• Blank forms are more reliable but rarely used because of lower response rate. Invoice confirmation(type of positive confirmation)• Used when client’s customer use voucher systems that allow them to confirm

individual invoice but NOT balance info. • An invoice confirmation is another type of positive confirmation in which an

individual invoice is confirmed rather than the customer's entire balance.• Better response rate. Negative confirmation• A negative confirmation requests a response only when the debtor disagrees with

the stated amount.


• More reliable because auditors perform follow-up procedures if a response not received from debtor.


In a negative confirmation, failure to reply must be regarded as a correct response, even thought the debtor might have ignore the confirmation request

Negative confirmations are less reliable and also less expensive because there are no second requests and no follow-up for nonresponse

Auditing standards state that it is acceptable to use negative confirmations only when all of the following conditions are meet Risk of material misstatement is low Large number of small account balances Expected low exception rate Expect adequate consideration from recipients

Most often used for audits of hospitals, retail stores, banks, and other industries where receivables are due from the general public.


The most reliable evidence from confirmationsis obtained when they are sent as close to thebalance sheet date as possible.

• However, as a means of completing the audit on a timely basis, it is often necessary to confirm the accounts at an interim date.

• It is permissible if internal controls are adequate and can provide reasonable assurance that sales, cash receipts and other credits are properly record between the confirmation date and the fiscal year end.

• If the decision is made to confirm accounts receivable before year-end, the auditor typically prepares a roll-forward schedule that reconciles the accounts receivable balance at the confirmation date to accounts receivable at the balance sheet date.


materiality

Sample Size factors

Control Risk

Detection risk

Inherent Risk

Type of Confirmation


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 directly from the customer to the auditor

A return address must be included on all envelops to make sure that undelivered mail is received by the CPA firm.

Self-addressed return envelops accompanying the confirmations must be addressed for delivery to the CPA firm’s office.


When positive confirmations are used,Auditing standards require follow-up procedures for confirmations not returned by the customer.

Alternate Procedures

Subsequent cash receipts

Duplicate sales

invoices

Shipping documents


Payment-in-transit

Shipment-in-transit

The goods have been returned

Errors and disputes



Documents

Chapter 16 PPTs.pdf