Completing the Tests

in the Sales and

Collection Cycle:
Accounts Receivable
Chapter 14

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 1
Describe the methodology for
designing tests of details of
balances using the audit
risk model.

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Accounts Receivable Balancerelated Audit Objectives

1. Detail tie-in

5. Classification

2. Existence

6. Cutoff

3. Completeness

7. Realizable value

4. Accuracy

8. Rights

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Methodology for Designing Tests

of Details of Balances for A/R
Identify client business
risks affecting
accounts receivable

Phase I

Set tolerable misstatement

and assess inherent risk Phase I
for accounts receivable
Assess control risk for
Phase I
sales and collection cycle
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Methodology for Designing Tests

of Details of Balances for A/R
Design and perform
tests of controls and
substantive tests
Phase II
of transactions
for the sales and
collection cycle

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Methodology for Designing Tests

of Details of Balances for A/R
Design and perform
analytical procedures
Phase III
for accounts
receivable balance
Design tests of
Audit procedures
details of accounts
Sample size
receivable balance
to satisfy
Items to select
balance-related
Timing
audit objectives
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

Phase III

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Occurrence
Completeness
Accuracy
Posting and
summarization
Classification
Timing

Rights

Realizable
value

Cutoff

Classification

Accuracy

Sales

Completeness

Translation-related
audit objectives

Existence

ACCOUNTS RECEIVABLE
BALANCE-RELATED
AUDIT OBJECTIVES

Detail tie-in

Relationship Between Sales

and Accounts Receivable

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Occurrence
Completeness
Accuracy
Posting and
summarization
Classification
Timing

Rights

Realizable
value

Cutoff

Classification

Accuracy

Cash receipts

Completeness

Translation-related
audit objectives

Existence

ACCOUNTS RECEIVABLE
BALANCE-RELATED
AUDIT OBJECTIVES

Detail tie-in

Relationship Between Sales

and Accounts Receivable

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 2
Design and perform analytical
procedures for accounts in the
sales and collection cycle.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Analytical Procedures for the

Sales and Collection Cycle
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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Analytical Procedures for the

Sales and Collection Cycle
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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Analytical Procedures for the

Sales and Collection Cycle
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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Comparative Information for

PT Perkakas Prima - Sales and
Collection Cycle Percent
Percent
change
change
12/31/07 2006- 12/31/06 20052007
(Rp000) 2006
(Rp000)

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

12/31/05
(Rp000)

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

258

16.7

221

5.7

209

37

15.6

32

6.7

30

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Analytical Procedures for PT

Perkakas Prima - Sales and
Collection Cycle
12/31/07 12/31/06 12/31/05
Gross margin/net sales
Sales returns and allowances/
gross sales
Bad debt expense/net sales
Allowance for uncollectible
accounts/accounts receivable
Number of days receivables
outstanding
Net accounts receivable/
current assets

27.85%

27.70%

27.68%

0.90%
2.30%

0.90%
2.60%

0.90%
2.60%

6.10%

7.50%

6.40%

48.09

47.96

49.32

37.20%

32.50%

32.30%

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Analytical Procedures for

Gross Margin
Gross margin percent
2007

2006

2005

Great
Great
Great
Western Industry Western Industry Western Industry

Hardwood
Softwood
Plywood

36.3
23.9
40.3

32.4
22.0
50.1

36.4
20.3
44.2

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

32.5
22.1
54.3

36.0
20.5
45.4

32.3
22.3
55.6

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Learning Objective 3
Design and perform tests of
details of balances for accounts
receivable.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Designing Tests of Detail

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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 4
Obtain and evaluate accounts
receivable confirmations.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Auditing Standards
Requirements
1. Accounts receivable are immaterial.
2. The auditor considers confirmations
ineffective evidence because response
rates will likely be inadequate or unreliable.
3. The combined level of inherent risk and
control risk is low and other substantive
evidence can be accumulated to provide
sufficient evidence.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Type of Confirmation
Positive confirmation
Blank confirmation form
Invoice confirmation
Negative confirmation

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Sample Size
Tolerable misstatement
Inherent risk
Control risk
Achieved detection risk from
other substantive tests
Type of confirmation

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Maintaining Control
After the items for confirmation have been
selected, the auditor must maintain control
of the confirmations until they are returned
from the customer.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Follow-up on Nonresponses
When positive confirmations are used,
PSA 07 requires follow-up procedures
for confirmations not returned by
he customer.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Subsequent Cash Receipts

Evidence of the receipt of cash subsequent
to the confirmation date includes examining
remittance advices, entries in the cash
receipts records, or perhaps even
subsequent credits in the accounts
receivable master file.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Duplicate Sales Invoices

These are useful in verifying the actual
issuance of a sales invoice and the
actual date of the billing.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Shipping Documents
These are important in establishing
whether the shipment was actually
made and as a test of cutoff.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Analysis of Difference
Payment has already been made
Goods have not been received
The goods have been returned
Clerical errors and disputed accounts

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 5
Design audit procedures for the
audit of accounts receivable,
using an evidence planning
worksheet as a guide.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Source of Each Row in the

Evidence Planning Worksheet
Tolerable misstatement
Acceptable audit risk
Inherent risk
Control risk
Substantive tests of
transactions results
Analytical procedures
Planned detection risk and
planned audit evidence

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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End of Chapter 14

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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