Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Chapter 16

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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

Detail tie-in Existence Rights

Completeness

A/R Audit Objectives

Realizable value

Accuracy Classification
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Cutoff

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Methodology for Designing Tests of Details of Balances for A/R

Phase I

Identify client business risks affecting Accounts Receivable

Set tolerable misstatement and assess inherent risk for accounts receivable

Assess control risk for sales and collection cycle

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2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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

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Methodology for Designing Tests of Details of Balances for A/R

Phase III
Design and perform analytical procedures for accounts receivable Audit procedures
Design tests of details of accounts receivable balance to satisfy balance-related objectives

Sample size

Items to select

Timing

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Relationship Between Sales and Accounts Receivable

Completeness

Classification

Detail tie-in

Sales

Occurrence Completeness Accuracy Posting and summarization Classification Timing

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Rights

Cutoff

Translation-related audit objectives

Realizable value

ACCOUNTS RECEIVABLE BALANCE-RELATED AUDIT OBJECTIVES

Existence

Accuracy

Relationship Between Sales and Accounts Receivable

Completeness Classification Detail tie-in
Translation-related audit objectives

Realizable value

ACCOUNTS RECEIVABLE BALANCE-RELATED AUDIT OBJECTIVES

Existence

Accuracy

Cash receipts

Occurrence Completeness Accuracy Posting and summarization Classification Timing

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Rights

Cutoff

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

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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

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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

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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

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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

Percent Percent change 12/31/11 change 12/31/10 2009- 12/31/09 ($000) 2010-11 ($000) 2010 ($000) 9.0 132,421 7.0 123,737 9.6 36,350 7.0 33,961 7.3 18,827 14.1 16,505 (2.1) 3,394 7.3 3,162 14.0 44,779 6.6 41,989 (7.0) 66,021 8.0 61,147 21.9 4,659 39.0 3,351 16.7 15.6 221 32 5.7 6.7 209 30
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2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Analytical Procedures: Sales and Collection Cycle

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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

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

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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

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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

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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

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Learning Objective 4
Obtain and evaluate accounts receivable confirmations.

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Confirmation Requirements
Auditing Standards
United States Required Except when:
Expected low response rate Low inherent & control risks Alternate Procedures
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International Confirmations not required

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

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Positive Confirmation

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Negative Confirmation Requirements

Risk of material misstatement is low Large number of small account balances Expected low exception rate

Expect adequate consideration from recipients

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Negative Confirmation

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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.

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Sampling Decisions
Tolerable misstatement Inherent Risk Control Risk

Sample Size factors

Achieved Detection risk from other tests

Type of Confirmation

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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.
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Follow-up on Nonresponses
When positive confirmations are used, AU 330 requires follow-up procedures for confirmations not returned by the customer.

Alternate Procedures

Subsequent cash receipts

Duplicate sales invoices

Shipping documents
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Analysis of Differences
Payment-in-transit
Shipment-in-transit The goods have been returned Errors and disputes

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

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

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Evidence Planning Worksheet

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End of Chapter 16

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