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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5 - 5
Completing the Tests in the Sales and Collection Cycle:
Accounts Receivable
Chapter 16
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 2
Learning Objective 1
Describe the methodology for designing tests of details of balances using the audit
risk model.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 3
Accounts Receivable Balance-related Audit Objectives
Cutoff
Detail tie-in
Existence Rights
Accuracy
Classification
A/R
Audit
Objectives
Realizable value Completeness
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 4
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
cycle
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 5
Methodology for Designing Tests of Details of Balances for A/R
Phase II
Design and perform tests of controls and substantive tests of transactions for the sales and collection cycle
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 6
Methodology for Designing Tests of Details of Balances for A/R
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
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 7
Relationship Between Sales and Accounts Receivable
ACCOUNTS RECEIVABLE BALANCE-RELATED AUDIT OBJECTIVES
Translation-related audit objectives
Sales
Occurrence
Completeness
Accuracy
Posting and summarization
Classification
Timing
De
tail
tie
-in
Ex
iste
nce
Co
mp
lete
ne
ss
Accu
racy
Cla
ssif
ica
tio
n
Cu
toff
Re
ali
za
ble
va
lue
Rig
hts
× ×
×
×
×
×
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 8
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
De
tail
tie
-in
Ex
iste
nce
Co
mp
lete
ne
ss
Accu
racy
Cla
ssif
ica
tio
n
Cu
toff
Re
ali
za
ble
va
lue
Rig
hts
× ×
×
×
×
×
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 9
Learning Objective 2
Design and perform analytical procedures for accounts in the sales and collection cycle.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 10
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:
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 11
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
Compare with previous years:
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 12
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
Write-off of uncollectible accounts as a percentage of total accounts receivable
Compare with previous years:
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 13
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
258
37
9.0 9.6 7.3
(2.1) 14.0 (7.0) 21.9
16.7
15.6
132,421 36,350 18,827 3,394 44,779 66,021 4,659
221
32
7.0 7.0 14.1 7.3 6.6 8.0 39.0
5.7
6.7
123,737 33,961 16,505 3,162 41,989 61,147 3,351
209
30
12/31/11 ($000)
Percent change 2010-11
12/31/10 ($000)
Percent change 2009- 2010
12/31/09 ($000)
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 14
Analytical Procedures: Sales and Collection Cycle
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 15
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
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 16
Learning Objective 3
Design and perform tests of details of balances for accounts receivable.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 17
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
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 18
Designing Tests of Detail of Balances
Accounts receivable are accurate Accounts receivable are properly classified Cutoff for accounts receivable is correct
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 19
Designing Tests of Detail of Balances
Accounts receivable is stated at realizable value The client has rights to accounts receivable Accounts receivable presentation and disclosure
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 20
Learning Objective 4
Obtain and evaluate accounts receivable confirmations.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 21
Confirmation Requirements
Auditing Standards
United States International
Required Except when:
Low inherent & control risks
Expected low response rate
Confirmations not required
Alternate Procedures
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 22
Type of Confirmation
Positive confirmation Blank confirmation form
Invoice confirmation
Negative confirmation
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 23
Positive Confirmation
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 24
Negative Confirmation Requirements
Risk of material misstatement is low Large number of small account balances
Expected low exception rate
Expect adequate consideration from recipients
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 25
Negative Confirmation
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 26
Timing
The most reliable evidence from confirmations is obtained when they are sent as close to the balance sheet date as possible.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 27
Sampling Decisions
Achieved Detection risk from
other tests
Tolerable misstatement
Inherent Risk
Type of Confirmation
Sample
Size factors
Control Risk
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 28
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.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 29
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
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 30
Analysis of Differences
Payment-in-transit Shipment-in-transit
The goods have been returned
Errors and disputes
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 31
Drawing Conclusions
Reevaluate internal control Evaluate the qualitative nature of misstatements Determine whether sufficient evidence was obtained
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 32
Learning Objective 5
Design audit procedures for the audit of accounts receivable, using an evidence planning worksheet as a guide.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 33
Evidence Planning Worksheet
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5 - 5
End of Chapter 16