Completing the Tests in the Sales and Collection Cycle:

Copyright © 2014 Pearson Education

Chapter 16

Completing the Tests in the Sales

and Collection Cycle:

Accounts Receivable

Copyright © 2014 Pearson Education16-2

Describe the methodology for designing tests of details of balances using the audit risk model.Design and perform analytical procedures for accounts in the sales and collection cycle.Design and perform tests of details of balances for accounts receivable.


Obtain and evaluate accounts receivable confirmations.Design audit procedures for the audit of accounts receivable, using the evidence planning worksheet as a guide.


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

risk model.

16-4

1


Detail tie-in

A/RAudit

Objectives

Classification

Rights

Realizable value

Cutoff

Existence

Completeness

Accuracy


Phase I

Identify client business

risks affecting Accounts

Receivable

Set performance 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


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


ACCOUNTS RECEIVABLEBALANCE-RELATEDAUDIT OBJECTIVES

Translation-relatedaudit objectives

Sales Det

ail t

ie-in

Exis

tenc

e

Com

plet

enes

s

Accu

racy

Clas

sific

atio

n

Cuto

ff

Real

izab

leva

lue

Righ

ts

OccurrenceCompletenessAccuracyPosting andsummarizationClassificationTiming


ACCOUNTS RECEIVABLEBALANCE-RELATEDAUDIT OBJECTIVES

Translation-relatedaudit objectivesCash receipts D

etai

l tie

-in

Exis

tenc

e

Com

plet

enes

s

Accu

racy

Clas

sific

atio

n

Cuto

ff

Real

izab

leva

lue

Righ

ts

OccurrenceCompletenessAccuracyPosting andsummarizationClassificationTiming


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

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2


Compare by product line: 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 with previous years: 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


12/31/13($000)

Percentchange2012-13

12/31/12($000)

Percentchange2011-2012

12/31/11($000)

SalesGross marginAccounts receivableBad debt expenseTotal current assetsTotal assetsNet earningsNumber of accounts receivableNumber 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 7.014.1 7.3 6.6 8.039.0

5.7

6.7

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

209

30



Planned detection risk for eachobjective is an auditor decision

Combining the factors that determineplanned detection risk is complex


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

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3


Accounts receivable are correctly added andagree with the Master File and the GeneralLedger (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 atrealizable value

The client has rights to accounts receivable

Accounts receivable presentation and disclosure


Obtain and evaluate accounts receivable confirmations.

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4


Auditing Standards

United States

Required Except when:

Expected low response rateLow inherent & control risks

Alternate Procedur

es

International

Confirmations not required


Positive confirmation

Blank confirmation form

Invoice confirmation

Negative confirmation



Risk of material misstatement is low

Large number of small account balances

Expected low exception rate

Expect adequate consideration from recipients



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


Performance materiality

Sample Size factors

Control Risk

Achieved Detection risk from

other tests

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 mailingthe confirmations and maintaining controlof the confirmations until they are returnedfrom the customer.


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


Reevaluate internal control

Evaluate the qualitative nature ofmisstatements

Determine whether sufficient evidencewas obtained


Design audit procedures for the audit of accounts receivable, using an evidence

planning worksheet as a guide.

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5




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Completing the Tests in the Sales and Collection Cycle: