5.

4 (E) Accounts Receivable, Trade

1 Introduction

This section deals with current receivables; long-term receivables are discussed in
section 5.9 Long-Term Receivables, Non-Current Deposits, and Other Assets in this
manual.

In planning the audit of receivables, we consider the fact that certain types of
receivables (e.g., receivables of contractors) require specialized accounting, auditing
and reporting considerations. This section does not deal specifically with such
specialized situations. Instead, we refer to the Illustrative Sector Substantive
Procedures (“ISSPs”), EY specialized industry supplements and other authoritative
sources, or consult with the firm’s industry specialists.

The principal objectives in auditing accounts receivable are to determine whether:

· All receivables on the balance sheet are real claims of the entity (Existence
assertion);

· All real claims of the entity for amounts receivable are included on the balance
sheet (Completeness assertion);

· Receivables are carried at their net realizable (collectable) value (i.e., the
gross receivables are properly stated with appropriate allowances provided for
doubtful accounts, discounts, returns, warranties and similar items) (Valuation
assertion);

· The entity owns, or has a legal right to, all the receivables on the balance
sheet at the balance sheet date. All receivables are free of liens, pledges, or other
security interests or, if not, such liens, pledges, or other security interests are
identified (Rights and Obligations assertion);

· Receivables are properly classified, described, and disclosed in the financial

statements, including notes, in accordance with the applicable financial reporting
framework (Presentation and Disclosure assertion).

2 Inherent Risk Factors

S08 Make Combined Risk Assessments of the EY Global Audit Methodology (“EY
GAM”) provides information on our inherent risk assessments. The following items are
examples of inherent risk factors that may increase the inherent risk for this account
or disclosure. When the opposite situations exist, that would decrease inherent risk
for the account or disclosure.

Nature of the item

· The size of the account or disclosure is significant;

· Our prior audit experience indicates that there have been frequent errors in
the account balance;

· The valuation of receivables is highly subjective;

· The results of our planning analytics do not coincide with our expectations;

· Complex or unusual transactions occurred at or near the end of the period;

· Related party transactions exist;

· Large and/or unusual sales agreements exist;

· Liens, pledges, or other security interests in receivables exist;

· Certain receivables have been sold with recourse;

· The nature of products sold or services rendered is such that the quantity of
products shipped or the value of services rendered (and related credits issued) is
subject to estimation (e.g., cannot be precisely counted, weighed, or measured);

· Products sold or services rendered (and related credits issued) are difficult to
differentiate;

· Cash receipts are susceptible to misappropriation by the entity’s staff.

Nature of the business/industry

· The economy has weakened during the year;

· The volume of cash receipts is high;

· The volume of products sold or services rendered is high;

· Customer turnover is high;

· There is a significant amount of non-applied cash receipts;

· Customers are smaller, less-established companies;

 · Billing disputes occur frequently;

· To achieve sales targets, credit policies have been loosened to accept new
customers with weaker credit ratings;

· The prices for products or services change frequently;

· There is little consistency in the nature of products sold or services rendered,

the entity’s customers, the volume of products sold or services rendered, or the
type or volume of products returned or services credited by the entity;

· Sales are made on a conditional basis (e.g., trial and/or rental basis);

· The timing of sales recognition cannot be clearly established (e.g., percentage

of completion for long-term contracts or installment sales recognition);

· The value assigned to sales or to the transactions or events leading to credit

memo recognition cannot be clearly established;

· The invoice pricing structure is complex (e.g., many factors contributing to the
price such as sales/use tax, freight, foreign exchange, and discounts);

· The occurrence of transactions (e.g., products shipped) evidencing sales does

not coincide with the transfer of the title to the goods.

Organization of the Entity

· The selling function is decentralized (e.g., sales are made from various
locations or when numerous inter/intracompany transfers have occurred);

· The cash receipts function (including application to customer accounts) is

decentralized;

· The invoice or credit memo pricing function is performed in numerous locations

(e.g., pricing an invoice or credit with an out-of-date list in remote locations);

· The transactions or events leading to sales recognition or credit memo

issuance are not controlled by the entity (e.g., shipments made from public
warehouses, from consignees, or directly from suppliers or returns made to public
warehouses, to consignees, or directly to suppliers);

· There is economic dependence by, or on, one or more customers, including

related parties;

· Personnel responsible for this account have a lower level of competence or

experience;

· The entity has inadequate IT systems for the volume of activity, size, and/or
complexity of the account.
3 Primary Substantive Procedures applicable to
Accounts Receivable, Trade
EY GAM S11 Design Substantive Audit Procedures requires that we perform Primary
Substantive Procedures (“PSPs”) on all audit engagements for all significant accounts,
regardless of the combined risk assessments. The PSPs for Accounts Receivable,
Trade are set out in EY GAM S11_Exhibit 1 Appendix A : Primary Substantive
Procedures (PSP) by Account. Each of the PSPs is discussed further below.

PSPs describe the nature of the procedures to be performed. As part of the

development of our audit plan, we also include the timing and extent of the PSPs.

PSPs on their own will not necessarily provide all of the audit evidence we need on a
particular assertion for a significant account. Therefore, the audit plan also includes
other procedures we believe are necessary to appropriately respond to our combined
risk assessment. Illustrative analytical and general procedures are set out in
Appendix 2 Illustrative Procedures for Accounts Receivable, Trade, Regardless of Risk
Assessment. Illustrative substantive procedures responsive to risk assessment are
set out in Appendix 3 Illustrative Substantive Procedures for Accounts Receivable,
Trade that are Responsive to Risk Assessment.

3.1 PSP E1: Agreement of Sub-ledger with General Ledger

PSP E1: Agree receivables sub-ledger to the general ledger control account and investigate
large and unusual reconciling items.

We review the reconciliation prepared by the entity between the receivables

subledger and the control account, and investigate reconciling items, particularly any
unusual non-standard journal entries.

If we perform our substantive procedures at an interim date, we review the

reconciliation at both the interim date and at the year end. We compare the amount
and types of reconciling items between the interim date and the year end.

3.2 PSP E2: Confirmations and Subsequent Cash Receipts

PSP E2: Verify the existence of accounts receivable trade through confirmation, examination
of subsequent cash receipts, or other alternative procedures, as appropriate. Consider using
the audit risk tables or EY MicroSTART to determine the extent of the sample or document the
rationale for the sample selection in the workpapers.

3.2.1 Requesting Confirmation of Receivables

Confirmation of accounts receivable is an auditing procedure that may be used to
provide evidence of the existence of accounts receivable. Appendix 1 - Accounts
Receivable Confirmations discusses considerations when we plan to use confirmation
as a specific audit procedure, including considerations related to positive and negative
confirmations. For example, we may use positive confirmations when individual
balances are relatively large or when there is reason to believe that accounts may be
in dispute or may contain inaccuracies or irregularities.

In planning the timing and extent of confirmation of receivables, we consider, in

addition to our combined risk assessment, such matters as:

· The possibility of disputes, inaccuracies, or irregularities in the accounts;

· The probabilities that requests will receive consideration and that debtors will
be able to confirm the information requested; and

· The materiality of the amounts involved.

We send confirmations for as many accounts and monetary amounts as we need to

reach a conclusion on the receivables balance. We also consider confirming some
closed or zero balance accounts and some accounts with credit balances.

We select the accounts to confirm from a source such as a listing of accounts from
the receivables ledger. To determine that the selection source supports the accounts
receivable balance in the general ledger, we agree that total of receivables to the
general ledger at the confirmation date. If necessary, we perform appropriate
procedures on the reconciliation between the selection source and the general ledger,
including determining if reconciling items should be reflected in the confirmation
requests.
Requests are accompanied by detailed information sufficient to enable customers to
reply. This is often accomplished by including an itemized statement with the
confirmation request. If the nature of the entity’s business or customers (e.g.,
government, or other customers not maintaining detailed records by supplier) is such
that the customers may be unable to reply to requests for confirmation of account
balances, we consider confirming specific transactions rather than account balances
or including with the confirmation requests additional information (e.g., customers’
purchase order numbers) to facilitate the customers’ responses.

We may encounter unusual or complex transactions, or circumstances or evidence

establishing or suggesting that terms granted to customers differ from the terms
shown in the entity’s records (for example, we may encounter evidence of oral
modifications to agreements, such as unusual payment terms or liberal rights of
return). When we believe there is a moderate or high degree of risk that there may
be unrecorded significant modifications to terms granted to customers, we consider
requesting customers to confirm both the terms of sale and whether any
modifications exist. We make such requests of all customers to whom requests for
confirmation of balances are sent, or other appropriate selected customers. The
requests are made in separate letters because persons responsible for responding to
requests for confirmation of balances ordinarily are not knowledgeable about terms of
purchase.

Accounts selected for confirmation but not mailed at the request of the entity’s
management are examined by alternative procedures after considering and
investigating the entity’s reasons. Such requests may be indicative of problems with
collectability, disputed items, or irregularities in the account balances. We also
consider the implications of any restrictions on the confirmation process imposed by
the entity. We consider whether any restrictions on the confirmation procedures are
significant enough to constitute a limitation on the scope of our audit.

3.2.2 Confirmation Responses

Confirmation of individual accounts normally serves as a test of the existence of the

aggregate amounts due from customers and accordingly, errors noted on individual
requests are considered in evaluating the total balance of accounts receivable.

Conditions which frequently result in the reporting of confirmation exceptions include

in-transit items (e.g., payments made but not received, goods shipped but not
received), disputed sales terms, credits allowed but not reflected in the records, and
clerical errors. When significant or numerous differences are revealed by confirmation
responses, we consider whether further communications with these or other
customers, or other auditing procedures, are required.

3.2.3 Procedures in Lieu of Requesting or Obtaining

Confirmations
When confirmation requests are not sent or replies are not received, we use such
procedures as are necessary to obtain evidence of the existence of the accounts
receivable. We consider whether such alternative procedures are sufficient to provide
us with the needed assurance to permit us to issue an unqualified opinion (as to
scope) on the financial statements. Refer to the discussion of alternative procedures
in Appendix 1 - Accounts Receivable Confirmations for additional guidance.

Alternative procedures for accounts receivable include the examination of subsequent

collections and tests of charges and credits to the accounts. We perform tests of
charges by inspecting evidence of sales such as sales contracts or shipping records.
We perform tests of credits by referring to remittance advices, deposit slips, bank
statements, and cash receipts records. We recognize that, unless we see evidence
supporting the pre-year end date on the items represented by the payment on the
account, the subsequent collection of an account does not necessarily mean that the
receivable existed at the balance sheet date; it only means that the receivable existed
at some time.

3.3 PSP E3: Rollforward Procedures

PSP E3: If accounts are verified at an interim date, review the rollforward of activity from the
interim date to the balance sheet date in a manner responsive to our combined risk
assessment and compare level of activity with prior periods. Investigate unusual items;
consider confirming (at the balance sheet date) significant new accounts and those accounts
with significant increases or decreases between the interim date and the balance sheet date.

The extent of our rollforward procedures depends on the risk assessments for sales,
sale returns and allowance, and cash receipts.

When receivables are verified at an interim date, we (1) review an analysis of the
activity (rollforward) in the receivable control accounts, along with supporting details
(e.g., journal entries), from the interim date to the balance sheet date; and (2)
perform detailed tests of the intervening transactions if deemed necessary.
Procedures may include:

· Obtain a schedule of movements on the receivables control account from

confirmation date to balance sheet date, and follow up significant control account
entries from unusual sources or that are larger/smaller than normal;

· Explain significant fluctuations in receivables in the month before and the

 month after the confirmation date, and investigate unusual items;

· If appropriate, confirm significant new accounts or accounts with significant

changes between confirmation and balance sheet dates, or perform alternative
verification on such accounts;

· Perform relevant procedures on the sales, sales returns and allowances, and
cash receipts applications during the rollforward period.

3.4 PSP E4: Accounts Receivable Cutoff

PSP E4: Perform analytical procedures to identify peaks in sales volume in the last few days
or weeks of the year and test cutoff by inspecting sales register, billings, shipping documents
and other supporting documents before and after the year end date. Where we perform
substantive procedures at an interim date, we perform cutoff testing at that date also.

Our cutoff procedures include:

· Obtain cutoff information such as numbers on last shipping documents,

invoices, credit memos and cash receipts, and details of intercompany shipments
for a suitable period on either side of the cutoff date;

· Note any unusual documents or blocks of unused documents for subsequent

follow-up;

· Review the summaries of activity for the month pre and post year end.
Compare the activity to that expected, paying particular attention to peaks in
sales volumes, and with the same period in the prior year and the budget. Where
actual activity significantly differs from our expectation, we investigate further.

· Inspect a sample of transactions from the activity listing before and after cutoff
date. Inspect supporting documentation. Ensure that the transactions were
recorded in the proper period; and

· Compare the receivables cutoff with cutoffs in related areas, e.g. sales and
cash.
3.5 PSP E5: Allowance for Doubtful Accounts

PSP E5: Evaluate the adequacy of the allowance for doubtful accounts, including the
appropriateness of the methodology used to calculate the allowance.

The extent and timing of our procedures to verify the allowance for doubtful
receivables depends on our risk assessment for the valuation assertion.

We evaluate the entity’s process for establishing the allowance for doubtful accounts.
Our evaluation includes:

· Obtaining a general understanding of the process;

· Considering the reasonableness of the entity’s policies regarding additions to

the allowance and write-offs of doubtful accounts;

· Discussing with management the key assumptions regarding collectability and

evaluating the reasonableness of the assumptions;

· Considering the effectiveness of the controls over the data used in the process;

· Determining that significant amounts written off during the year have been
approved by a responsible official independent of the cash receipts, sales and
receivables functions; and

· Evaluating the entity’s method of calculating the allowance (i.e., of applying its
policies).

Procedures we perform to evaluate the allowance for doubtful accounts include:

· Review the analysis of activity in the allowance for doubtful accounts and bad
debt expense accounts during the period;

· Consider whether any circumstances have arisen that may have an impact on
the collectability of any receivables;

· Consider the adequacy of the provisions in the context of expectations in the

industry and economic climate. Compare the provision to the prior year and to the
 expense in the current year;

· Review the aged debt listing and results of our confirmation procedures and
determine if old debts (for example, older than 90 days) have been appropriately
provided for;

· Test the accuracy of the accounts receivable aging by tracing details to and
from the customers’ ledger accounts or supporting documentation. Test the aging
for clerical accuracy;

· Consider obtaining external verification for significant unpaid receivables, for

example, a copy of the customer’s financial statements;

· Consider requesting confirmation of accounts written off during the period; and

· Review payments received subsequent to the balance sheet or confirmation

date.

Factors that we consider in evaluating whether a receivable is collectable include:

· Our combined risk assessment for the valuation assertion;

· The age of the receivables, understanding the entity’s customary terms of

sales, the conditions under which goods may be returned, and how collections and
credit memos are applied to outstanding balances;

· The soundness of the entity’s credit granting and collection procedures;

· Collection experience subsequent to the balance sheet date;

· Historical bad debt experience;

· Comparative statistics for the current period and prior periods, such as the
relationships of accounts written off and the allowance and provision for doubtful
accounts to accounts receivable and sales; and

· Conditions and trends in the industry and the economy in general.

In circumstances when we cannot conclude on the reasonableness of accounts written

off, we send a confirmation request to the entity’s customer. If the customer confirms
the balance written off without delays or exceptions, the amount written off may have
been overstated or payments received but misappropriated by entity personnel. In
our direct communication with customers, we take care to avoid providing any
information indicating their accounts have been written off by the entity.

When the adequacy of the allowance for doubtful accounts is evaluated at an interim
date, we perform rollforward procedures similar to those described in subsection 3.3
PSP E3: Rollforward Procedures above for the receivable control accounts.

3.6 PSP E6: Other Adjustments to Accounts Receivable

PSP E6: Evaluate the adequacy of other adjustments to accounts receivables, such as
rebates, credit memos, discounts.

We evaluate the adequacy of the entity’s allowances for discounts, returns of

merchandise, warranties, and similar items by:

· Understanding and evaluating the entity’s processes for establishing those

allowances;

· Inquiring of management about the terms of sales and of warranties;

· Examining evidence stating terms (e.g., contracts, sales catalogues, and

correspondence files);

· Reviewing historical experience;

· Examining activity subsequent to the balance sheet date;

· Identifying significant new products or changes in existing products during the

year;

· Identifying significant production or quality control problems during the year;

· Recomputing the entity’s allowance; and

· Considering the results of other audit procedures (e.g., confirmations and

reviews of related expense accounts).

In performing these procedures, we consider whether there are conditions suggesting

that terms other than those recorded or those expected in the normal course of
business may have been granted. Examples of such conditions are:

· Large shipments to new customers - An entity may give special terms to new
 customers on initial purchases;

· A change from the consignment basis of shipment to the invoiced sales basis -
In conjunction with such a change, arrangements may have been made that do
not alter the basic consignment nature of the transaction (e.g., the risk of loss
remains with the seller, unsold goods may be returned);

· Warehousing arrangements - Goods billed to customers may be held in a

warehouse for later shipment at the customers’ instructions (see subsection 3.9.1
Bill and Hold Transactions below);

· Industry practices - Special arrangements granted to certain customers

regarding payment terms and rights of return are more common in some
industries than in others;

· Receivables from particular customers are larger than normal, or receivables

are unpaid for abnormally long periods of time.

If we encounter such conditions, we consider requesting customers to confirm the

terms of sale as previously discussed.

3.7 PSP E7: Accounts Receivable in Foreign Currencies

PSP E7: Test appropriate valuation of accounts receivables in foreign currencies.

We review the translation of significant balances denominated in foreign currencies

for reasonableness, or, if appropriate, we reperform the translation of foreign
currency balances.

3.8 PSP E8: Credit Balances and Unusual Items

PSP E8: Inquire about or review list of credit balances and investigate large items.

We review the listing of credit transactions/balances for large/unusual items, and test
the completeness of the listing. We investigate why major credit balances have
arisen and consider their impact on year end receivables.

3.9 Other Considerations

3.9.1 Bill and Hold Transactions

During our procedures, we are alert for any bill and hold transactions that have been
improperly recognized as sales. For example, if the entity bills the customer prior to
the shipment of the items without specific instructions from the customer, this should
not be recorded as a sale. A sale is generally recognized only when the earnings
process is complete or virtually complete and an exchange has taken place.

3.9.2 Barter Transactions

We evaluate receivables arising from barter transactions to ascertain that they are
bona fide receivables and that the prices used in establishing the amount are
reasonable in view of the products or services exchanged. Such receivables will also
be included in our confirmation process and will be reviewed to determine whether
the allowance for doubtful accounts is appropriate.

3.9.3 Unrecorded Sales and Accounts Receivable

We are concerned with the completeness (i.e., understatement) of receivables and

revenues as well as with the existence (i.e., overstatement) of these accounts. As a
consequence, we perform tests for unrecorded sales unless we have satisfied
ourselves that the entity has effective controls in place to determine that all sales are
recorded. If considered necessary, tests for unrecorded sales can be accomplished by
tracing selected shipments from the inventory records into the sales records and
customers’ accounts. If the entity is engaged in the provision of services, the tracing
can be made from the records of services performed. Usually, it will be necessary to
test the completeness and accuracy of the inventory or service records used for this
purpose. Breaks in the sequence of the sales invoice numbers in the sales register
may indicate that revenues are understated. We can perform tests for such breaks by
accounting for selected blocks of invoice numbers.

3.9.4 Factored or Discounted Receivables

Entities may transfer receivables to others with or without recourse for non-collection
from customers (e.g., they discount or factor their receivables). Although there are
many types of arrangements under which receivables are transferred, and a number
of variations within each type, the transferor of receivables with recourse retains the
risk of loss from non-payment by its customers. To obtain evidence regarding any
loss contingency, we obtain a detailed listing of the amounts not yet collected with
respect to receivables transferred with recourse, and test-check the accuracy of the
list. We confirm the amounts transferred with the transferee. In addition, we
consider whether to confirm the receivables directly with the customers.

3.9.5 Notes Receivable

The audit procedures for notes receivable are similar to those for trade receivables.
However, as notes receivable are often interest bearing and have a stated term, it is
important to consider:

· Dates of maturity, if applicable, to determine the correct classification in the

financial statements;

· Interest rates;

· Dates to which interest has been paid or, if interest is in arrears, the amount of
interest owing and dates to which it has been charged;

· Property or other security provided as collateral for the receivable and

guarantees held (if any); and

· Borrower’s charges (if any).

Therefore, in addition to the audit procedures we apply to accounts receivable, we

perform the following procedures in respect of notes receivable:

· Review a summary of notes receivable and the related interest accounts and
examine the activity in them during the period with respect to large balances
arising other than in the normal course of business. Determine that amounts are
properly classified;

· Confirm notes receivable, including any collateral and any guarantees held;
determine that necessary disclosures are made;

· Verify accrued interest at the balance sheet date and interest earned during
the period; and

· Evaluate the adequacy of any collateral and guarantees on notes receivable.

4 General Procedures and Analytical Procedures
As discussed above in subsection 3 Primary Substantive Procedures Applicable to
Accounts Receivable, Trade, we may decide that it is appropriate to perform
procedures in addition to the PSPs. Refer to Appendix 2 Additional Illustrative
Procedures to Consider for Accounts Receivable, Trade, Regardless of Risk
Assessment for examples of general procedures and analytical procedures that we
may wish to perform.

5 Procedures Responsive to Risk Assessment

Refer to Appendix 3 Illustrative Procedures for Accounts Receivable, Trade,
Responsive to Risk Assessment for examples of procedures that may, together with
the procedures previously discussed, be useful in achieving the primary account
balance audit objectives when our evaluation of classes of routine transactions
indicates potential errors.

We need not perform these application-related procedures when we have evaluated

the controls as “effective” and tested them (using full tests of controls) and found
that we can place reliance on them, or when the primary substantive procedures can
provide sufficient assurance that the potential errors in question have not occurred.

We consider performing these procedures when we have evaluated the controls as

effective, but have only performed limited tests of controls (especially when our
combined risk assessment for the account is “moderate” since in such circumstances
we would have assessed inherent risk as higher), and we are more likely to perform
them when we have evaluated the controls as ineffective.

The timing and extent of the procedures performed are responsive to our combined
risk assessments.

6 Documentation

Documentation includes, but is not limited to, identification of the following:

· The procedures performed (generally the audit plan or reference to it) and
conclusions reached with respect to the procedures performed, together with a
conclusion statement with respect to receivables;

· The relationship of the nature, timing, and extent of procedures performed to

the evaluation of the accounting estimation, routine data, and non-routine data
processes, or reference to the documentation of such relationship elsewhere in
the audit workpapers;
· The problems encountered and bases of resolution; and

· To the extent appropriate, the following:

o Summary of accounts receivable;

o Aged composition of accounts receivable at the balance sheet date and, if

significantly different, at the interim date as well;

o Rationale for various dates selected for confirming or otherwise verifying

accounts receivable (interim or year end), methods used (e.g., positive and
negative confirmations), and sample size (percent of total accounts and
dollars);

o Accounts that were selected for confirmation or other verification;

o Confirmation replies, including appropriate documentation of oral

confirmations;

o Analysis of the results of the confirmation or other verification procedures;

o Reconciliations between detailed listings and control accounts;

o The rollforward of activity in the control accounts from the interim date to
the balance sheet date;

o The results of investigations of unusual items appearing in control accounts

or journal entries;

o The results of reviews of the receivables, sales, and inventory cutoffs;

o Summary of notes receivable and activity during the period;

o Details of any collateral and guarantees;

o Summary of interest income accrued and received on notes receivable

during the period;

o Analysis of activity in the allowance for doubtful accounts;

o Details regarding collection experience (including the period subsequent to

the balance sheet date), bad debt history, and whether significant individual
accounts are collectable;

o Analysis of activity in the allowances for discounts, returns of merchandise,

warranties and similar items, and summaries of historical experience;

o Bases for concluding whether the allowances are appropriate;

o Details of receivables from related parties;

 o List of receivables transferred with recourse and details of related loss
contingencies;

o Details of liens, pledges, and other security interests in receivables;

o Alternative procedures used when confirmation requests are not sent, and
the rationale for not confirming accounts; and

o Results of analytical review procedures performed.

Appendix 1 – Accounts Receivable Confirmations

1 Introduction

EY GAM E05_Exhibit 4 Use of External Confirmations discusses general considerations

when we plan to use external confirmation as a specific audit procedure. This
Appendix provides guidance on performing confirmations of accounts receivable.

When auditing accounts receivable, we may determine that performing a confirmation

of accounts receivable is an effective procedure. External confirmation of accounts
receivable provides strong evidence regarding the existence of receivables as of the
confirmation date and also provide evidence regarding the operation of cutoff
procedures, i.e., the completeness assertion. However, confirmations do not
ordinarily provide all of the necessary evidence relating to the valuation assertion,
since it is not practicable to ask the customer to confirm detailed information related
to its ability to pay the outstanding balance.

2 Determining whether to confirm accounts receivable

The primary substantive procedures (PSPs) require us to verify the existence of

accounts receivable through confirmation, examination of subsequent cash receipts or
other alternative procedures.

In determining whether to confirm accounts receivable, we consider, in addition to

our combined risk assessment and whether the evidence from other planned audit
procedures will reduce audit risk to an acceptably low level for the relevant
assertions, such matters as:

· The possibility of disputes, inaccuracies, or irregularities in the accounts;

· The likelihood that requests will receive appropriate consideration by the

customers and that they will be able to confirm the information requested; and
 · The materiality of the amounts involved.

We also consider information from prior years’ audits or audits of similar entities. This
information includes response rates, knowledge of misstatements identified during
prior years’ audits, and any knowledge of inaccurate information on returned
confirmations. For example, if we have experienced poor response rates to properly
designed confirmation requests in prior audits, we consider obtaining audit evidence
from other sources.

3 Designing the confirmation request

The design of a confirmation request may directly affect the confirmation response
rate, and the reliability and the nature of the audit evidence obtained from responses.
We design our confirmation requests to provide sufficient detailed information in a
format that is readily understood and enables a reply. Factors to consider when
designing confirmation requests include:

· The assertions being addressed.

· The nature of the information being confirmed.

· Specific identified risks of material misstatement, including fraud risks.

· The layout and presentation of the confirmation request.

· Prior experience on the audit or similar engagements.

· The method of communication (for example, in paper form or electronically).

· Management’s authorization or encouragement to the confirming parties to

respond to us. Confirming parties may only be willing to respond to a confirmation
request containing management’s authorization.

· The ability of the intended confirming party (i.e., the entity’s customer) to
confirm or provide the requested information (for example, individual invoice
amount versus total balance).

In addition, we obtain an understanding of the substance of the entity’s arrangements

and transactions with its customers in order to determine the appropriate information
to include on the confirmation requests.

3.1 Types of external confirmation

Two confirmation methods are available to us to use to confirm accounts receivable -
positive and negative confirmations. When confirming accounts receivable, we use
positive confirmation or a combination of positive and negative confirmations. The
use of negative confirmations is discussed in sub-section 10 Use of negative
confirmations for accounts receivable in this appendix. The rest of the appendix
focuses on the use of positive confirmations to confirm accounts receivable.

Positive Confirmation

Positive confirmation requests are designed either to ask the customer to indicate
whether the customer agrees with the information stated on the request, or to
request the customer to provide specific information, such as their account balance
with the entity (referred to as a blank form).

Since there is a risk that customers receiving a positive form of confirmation request
with the information to be confirmed contained on it may sign and return the
confirmation without verifying that the information is correct, blank forms may be
used as one way to mitigate this risk. Thus, the use of blank confirmation requests
may provide a greater degree of assurance about the information confirmed.
However, blank forms might result in lower response rates because additional effort
may be required of the customers.

To provide audit evidence, all positive confirmation requests need to be followed up

and evaluated. When we do not receive a reply, we perform alternative procedures
to satisfy ourselves regarding the existence of the receivable.

3.2 Timing – When to send confirmation requests

We allow sufficient time for initial and follow-up requests to be mailed, for replies to
be received, and for exceptions to be investigated.

We may be able to perform our confirmation procedures at an interim date. The

advantages of performing confirmation procedures at an interim date include:

· Providing evidence that the entity's processes are operating effectively;

· Allowing tight reporting deadlines to be met;

· If deficiencies are highlighted it may be possible for management to address

them before year end.

However, if the combined risk assessment is high, we ordinarily conduct the

confirmation procedures at the balance sheet date to avoid the need to perform
extensive substantive testing for the rollforward period. For example, if our combined
risk assessment is minimal or low, our rollforward may comprise analytical review
procedures and/or limited review and testing of transactions in the intervening period.
On the other hand, if our combined risk assessment is high, it will usually be
necessary to:

· perform more extensive testing of specific transactions; and

· test the existence, completeness and accuracy of each of the sources of

information (e.g., sales, cash receipts and returns).

3.3 Determining which balances to confirm

We send confirmation requests for as many accounts and monetary amounts as we

need to reach a conclusion on the receivables balance. We also consider confirming
some closed or zero balance accounts and some accounts with credit balances.

Balances or invoices are selected for testing from the entire accounts receivable
population. We select the accounts to confirm from the receivables ledger or from a
source such as a listing of accounts from the receivables ledger. If we use a source
such as a listing of accounts, we check that the details of the listing agree to the
receivables ledger. We also check the arithmetical accuracy of the listing.

To determine that the selection source supports the accounts receivable balance in
the general ledger, we agree the total of receivables to the general ledger at the
confirmation date. If necessary, we obtain a reconciliation between the selection
source and the general ledger and perform appropriate procedures on the
reconciliation, such as examining supporting evidence to verify reconciling items. We
also determine whether reconciling items should be reflected in the confirmation
requests.

We may decide to stratify the accounts receivable population and perform different
levels and types of testing on each stratum using an appropriate combination of
positive confirmation requests, alternative procedures, analytical review and negative
confirmation requests, depending on our risk assessments and the evidence we
require. For example, in a population of accounts receivable balances, we may decide
to perform tests on:

· Large accounts – select balances exceeding tolerable error (or a lower key-
item cutoff amount), i.e., key items, for 100% verification;

· Individually insignificant accounts that are significant in aggregate – draw a

representative sample for confirmation or alternative procedures;
 · Known disputed or problem accounts – examine these accounts by reviewing
details of the dispute or problem, discuss with management and examine
correspondence between the entity and the customer;

· Old unpaid accounts – consider management’s process for dealing with these
accounts, for example, efforts being made to collect payment. Examine
correspondence between the entity and the customer. Consider whether it is
appropriate to confirm these accounts. Determine whether a provision needs to be
made against these accounts;

· Accounts with negative balances (e.g. credit balance in the receivables ledger)
– investigate significant credit balances to determine reasons for the negative
balance and establish how management is dealing with these accounts. Consider
whether it is appropriate to confirm some of these credit balances.

Requests are accompanied by detailed information sufficient to enable customers to

reply. This is often accomplished by including an itemized statement with the
confirmation request.

If the nature of the entity’s business or customers (e.g., government, or other

customers not maintaining detailed records by supplier) is such that the customers
may be unable to reply to requests for confirmation of account balances, we consider
including additional information (e.g., details of the transactions making up the
balance, such as customers’ purchase order numbers) with the confirmation requests
to facilitate the customers’ responses.

Alternatively, we may decide to request confirmation of a selection of unpaid invoices

and unapplied credits (“open items”) instead of the entire account balance.
Confirming open items resolves the issue of customers who cannot confirm balances,
and also reduces the extent of alternative procedures required for non-responses.
However, confirming open items is subject to the risk that undisclosed sales,
undisclosed partial payments against a debt, and the possibility of double billing is not
identified.

If we decide to confirm open items:

The open item confirmation requests request details of credits that may apply to
outstanding debit items (for example, credit memos or round amount payments).

The representative sample of items to be confirmed is selected using Monetary Unit

Sampling (MUS) in which each currency unit (e.g., each Dollar or Euro) has an equal
chance of selection. In addition, credits are sampled as part of the population (so
that the population from which the sample is taken is the sum of the debits and
credits making up the accounts receivable balances). For further guidance on
sampling techniques, refer to E05_Exhibit 2 Representative Sampling using the Audit
Risk Tables in EY GAM.

We do not confirm open items:

· in conjunction with negative confirmations;

· on accounts that are not confirmed at management’s request;

· if the customer usually pays the account in rounded amounts;

· if the customer pays the statement balance; or

· when judgmental selection techniques are used to select the items for
confirmation.

In some circumstances, we may decide to exclude from the confirmation process

those balances that we know are unlikely to respond ( e.g., government
departments) and perform alternative procedures as the primary source of audit
evidence. If so, we document the rationale for doing so in our workpapers.

4 Performing the Confirmation

The reliability of the audit evidence we obtain from external confirmation of accounts
receivable depends on the appropriate execution of our confirmation procedures,
including considering factors such as the control we exercise over the confirmation
requests, the characteristics of the customers, and any restrictions included in the
response or imposed by management.

4.1 Controlling the confirmations

When using accounts receivable confirmation procedures, we maintain continuous and

complete control over the confirmation requests, including:

· Determining the information to be confirmed or requested;

· Selecting the appropriate customer;

· Designing the confirmation requests, including determining that requests are

properly addressed and contain return information for responses to be sent
directly to us, even though the confirmation requests are prepared on the entity’s
letterhead; and
 · Sending the requests, including follow-up requests when applicable, to the
customer.

Before mailing the confirmation requests, we check that:

· The details in the requests (such as customer names, addresses and open
item references) agree to the account in the receivables ledger. Determining that
requests are properly addressed includes testing the validity of some or all of the
addresses on confirmation requests before they are sent out;

· The requests have been signed by management, to authorize the customers to

provide us with the information;

· Return envelopes, bearing our address, accompany the request. A positive

external confirmation request asks the customer to reply to us in all cases, either
by indicating the customer’s agreement with the given information, or by asking
the customer to provide information;

· If applicable, the customer statements supporting the account balances are

attached to the confirmation requests; and

· Unknown or suspicious names/addresses are correct, for example by reference

to trade, telephone or online directories.

Even when the entity’s letterhead and stationery are used, we control the
confirmation requests by placing the requests in the envelopes and mailing them. This
gives us the assurance that all confirmations are sent, and that entity personnel are
unable to interfere with either the confirmations sent or the receipt and follow up of
responses.

The need to maintain control over the confirmation requests and responses does not
preclude us from using the internal auditors in the confirmation process, provided
that they work under our supervision and direction, and that we review and, as
considered necessary, test their work. When we plan to use internal auditors to
assist us in performing confirmation procedures, we consider the guidance in section
2.7 Using the work of the internal audit function in GSAM. .

We send an additional confirmation request when a reply to a previous request has

not been received within a reasonable time.

4.2 Undelivered confirmation requests

When requests for confirmation are returned undelivered, we investigate the reasons
for the non-delivery.
Where applicable, we resend confirmation requests to the correct address but where
the correct address cannot be determined (or the reasons for non-delivery are
otherwise unsatisfactory) we consider the validity of the account balance and perform
alternative procedures. We consider whether the undelivered confirmation request
represents a fraud risk factor that requires evaluation and whether we need to revise
our risk assessment. In addition, we critically review the recoverability of the
receivable, as management’s inability to provide a proper mailing address may
indicate that they will be unable to collect the receivable. However, considering the
recoverability of the amount is performed in addition to our alternative procedures –
not as a substitute for the alternative procedures. If we are unable to satisfy
ourselves regarding the existence of the account for which we requested positive
confirmation, we treat the amount as an error.

4.3 Management’s request not to send confirmations to certain customers

Management may ask us not to send confirmations to certain customers. Accounts

selected for confirmation but not mailed at the request of the entity’s management
are examined by alternative procedures after considering and investigating
management’s reasons. Such requests may be indicative of problems with
collectability, disputed items, or irregularities in the account balances. A common
reason advanced by management is the existence of a legal dispute or ongoing
negotiation with the customer, the resolution of which may be affected by an
untimely confirmation request. We seek audit evidence as to the validity and
reasonableness of these reasons because of the risk that management may be
attempting to deny us access to information that may reveal fraud or error.

We evaluate the implications of management’s refusal on our assessment of the

relevant risks of material misstatement, including the risk of fraud, and on the nature,
timing and extent of other audit procedures. We also consider whether the
restrictions on the confirmation procedures are significant enough to constitute a
limitation on the scope of our audit.

If, at management’s request, we do not send a confirmation to a customer, we

perform alternative audit procedures similar to those appropriate for a non-response,
as discussed in sub-section 6 Alternative procedures below.

4.4 Cutoff

In accordance with PSP E4, we perform cutoff tests on accounts receivable as of the
confirmation date. If the confirmation date is an interim date, we also perform cutoff
tests at the balance sheet date. Refer to subsection 3.4 PSP E4: Accounts Receivable
Cutoff in section 5.4 (E) Accounts Receivable, Trade of GSAM.

5 Confirmation Responses
We perform appropriate follow-up procedures on all positive confirmation requests.

When evaluating the results of individual confirmation requests, we may categorize

the results as:

· A response by the appropriate customer indicating agreement with the

information provided in the confirmation request, or providing requested
information without exception;

· A response where we have some questions about the reliability of the origin of
the confirmation (see 5.1 Questions about the origin of the confirmationbelow);

· A non-response (see 5.2 Non-responses below); or

· A response indicating an exception (see 5.3 Investigating exceptions below).

We evaluate all confirmation replies and investigate differences. We report all

differences to management, regardless of apparent importance, and we may ask
management to investigate and reconcile the differences, after we establish control
by making a copy or other record of the reply. If management are used to
investigate differences, we inspect, at least on a test basis, support for the
reconciliation and explanation of the differences.

We consider whether unreconciled differences represent errors, and evaluate any

errors, including, if applicable, projecting those found in a representative sample.
When we find significant or numerous differences, we consider the implications for
our risk assessments. We also consider the effect on the nature, timing and extent of
any further audit procedures, for example, whether to extend the scope of our
confirmation procedures by sending further confirmations.

5.1 Questions about the origin of the confirmation

It is important that the proof of origin can be demonstrated for all replies to
confirmation requests. Factors that may indicate doubts about the origin of a
response include that:

· We received it by fax or electronic mail;

· We received it indirectly, e.g., from the entity; or

· The confirmation appeared not to come from the original customer to whom it
was addressed.
In these circumstances, we verify the source and contents of a response to a
confirmation request by contacting the customer. For example, if we receive a
response by electronic mail, we telephone the sender to determine whether they did,
in fact, send the response and that they represent the customer selected for
confirmation. If the confirmation is received by fax, we may consider it to be reliable
if it is received following a direct fax or telephone request from us. If not, we confirm
the contents of the fax by telephone. In both cases, we request that the customer
return the original confirmation to us.

When a response has been returned to us indirectly (for example, because the
customer incorrectly addressed it to the entity), we request the customer to respond
in writing directly to us.

On its own, an oral response to a confirmation request does not meet the definition of
a confirmation because it is not a direct written response to us. When we obtain an
oral response to a confirmation request, we document the results of our conversation
with the customer, as well as our conclusion as to the reliability of the confirmation.
We request the customer to respond in writing directly to us. If no such response is
received, we seek other audit evidence to support the information in the oral
response.

If we conclude that a response is unreliable, we consider whether we need to revise

our assessment of the risks of material misstatement at the assertion level and
modify our planned audit procedures. For example, an unreliable response may
indicate a fraud risk factor that requires evaluation.

5.2 Non-responses

Failure to respond to a positive confirmation is normally followed up by means of a

second request, subject to the same control over the confirmations process as the
first. Where customers reply but state that they cannot respond to the confirmation
request, we consider whether the customer could respond if given additional
information and whether management can provide this information for inclusion in a
second request.

If we cannot obtain a reply, we ask management, preferably independent of the sales

accounting function, to follow up the outstanding items. We evaluate the results of
these follow-up procedures and perform additional or alternative audit procedures to
obtain sufficient appropriate audit evidence that, at the date of the confirmation, a
valid debt was due from a genuine customer.

5.3 Investigating exceptions

Typical exceptions that may arise in relation to accounts receivable include:

· Cash remitted by the customer before the confirmation date but received by
the entity after that date;

· Invoice not recorded by a customer at the confirmation date;

· Goods returned or credits claimed by the customer at the confirmation date

but recorded by the entity after that date; and

· Classification differences.

An exception may either be a timing difference or it may indicate an error. For

example, cash remitted by the customer before the confirmation date but received by
the entity after that date is usually the result of a timing difference in remitting,
banking and recording of cash. However, an error would be indicated if the entity has
already recorded the cash before the confirmation date and the subsequent recording
is a duplication.

Examples of the follow up procedures that would normally be conducted for some of
the more common exceptions are as follows:

· Cash already remitted - Check that the remittance was received and banked
(as well as recorded in the receivables ledger) after the confirmation date. We
take care when the remittance date advised by the customer (or shown on the
remittance advice) is an unusually long time before the confirmation date.

· Invoices not recorded by customer - Check to proof of delivery and determine

that the goods were delivered before the confirmation date. Consider the
possibility that a duplicate sale has been recorded by the entity and, if necessary,
review documentation for other sales made to that customer. Goods may be in
transit as at the confirmation date - i.e. the goods were dispatched before the
confirmation date but delivered after that date. In these cases, we check that the
sale has been accounted for in accordance with the entity's policy for recording
sales and that the policy is appropriate.

· Goods returned - This normally indicates that the sale has been cancelled.
Check the date that goods were returned to inventory and determine whether the
entity has recorded the appropriate adjusting entries, i.e.:

o If goods were returned before the confirmation date check that they were
included in inventory as at the balance date and that the sale has been
reversed;

o If goods were returned after the confirmation date check that a provision
has been recorded or other adjustments made to reverse the effect of the sale
and to include the goods in inventory;
 · Credits claimed - i.e. the customer disputes part of an invoice or cash is
subsequently received for only part of the invoice amount. The entity may record
a provision for credits claimed. Exceptions that are included in such provisions as
of the confirmation date will be cleared exceptions - i.e. there is no error since the
appropriate adjusting entry has already been recorded by the entity. If no
provision is recorded it will be necessary to assess the likelihood that the
customer will agree with the original invoice amount and subsequently clear the
debt.

· Classification differences - Invoices and receipts may be classified incorrectly,

but this misclassification may not necessarily indicate an error in the overall
amount of the accounts receivable balances. However, we consider the effect on
other areas of the audit, for example:

o The recoverability of receivables;

o The reliability of the aging of individual customer balances (if used for
evaluating doubtful debts); and

o When cash was received before the confirmation date for the receivable
selected for testing but was incorrectly posted to another customer account,
the sample selection will not have been made from an accurate population.
Since our sample selection includes items that were not actually outstanding,
we extend our sample size to compensate.

When significant or numerous differences are revealed by confirmation responses, we

consider whether further communications with these or other customers, or other
auditing procedures, are required.

6 Alternative procedures

When confirmation requests are not sent or replies are not received, we use such
procedures as are necessary to obtain evidence of the existence of accounts
receivable. We consider whether such alternative procedures are sufficient to provide
us with the needed assurance to permit us to issue an unqualified opinion (as to
scope) on the financial statements

Alternative procedures for accounts receivable include the examination of subsequent

cash receipts and tests of charges and credits to the accounts. We perform tests of
charges by inspecting evidence of sales such as sales contracts or shipping records.
We perform tests of credits by referring to remittance advices, deposit slips, bank
statements, and cash receipts records.

6.1 Examination of Subsequent Cash Receipts

In examining subsequent cash receipts, we are seeking assurance in an indirect
manner, i.e., a subsequent transaction (receipt) is being used to develop conclusions
about the first transaction (receivable). Accordingly, it is essential that there is a
sufficient connection between the two such that we are satisfied that the receipt does
actually relate to the receivable that was selected for confirmation.

In most circumstances, this will be achieved by scrutinizing the customers' remittance

advices that accompany the receipts. Procedures that would normally be conducted
include:

· Checking that the remittance advice is in the correct customer's name

(particularly where customers may have more than one account or have multiple
branches);

· Agreeing individual invoices on the remittance advice to the accounts

receivable sub-ledger at the confirmation date;

· Agreeing the total on remittance advice to the bank deposit slip and/or bank
statement; and

· Agreeing the total on the remittance advice to the cash receipts book or
equivalent journal (ensuring that the receipt was processed after the confirmation
date).

If the remittance advice is not sufficiently detailed, we carefully consider how we can
be satisfied that the receipt does relate to the receivable selected for confirmation
and not, for example, to sales after the confirmation date. We recognize that, unless
we see evidence supporting a pre-confirmation date on the items represented by a
payment on the account after confirmation date, subsequent collection does not
necessarily infer existence at the confirmation date – it means only that the
receivable existed at some time. Information on duplicate deposit slips, lists of cash
receipts or entries in the cash receipts ledger does not normally provide sufficient
evidence. The types of procedures that could be conducted include:

· Reviewing the nature of the receivables balance. For example, if there are few
sales, or say, a regular once a month sale, it may be relatively easy to infer which
sales the receipts relate to. On the other hand, if there are regular sales invoices
raised for the same amount, it is unlikely that the receipt could be clearly related
to any specific invoice(s).

· Reviewing sales after the confirmation date. Similarly, it may be possible to

infer that the receipt relates to a particular invoice(s) where it can be clearly
established that it could not relate to any other sales.

· Obtaining specific confirmation from the customer concerning which sales

invoice(s) the payment relates to.
The principal limitations of examining subsequent cash receipts are that:

· Much of the audit evidence (cash receipts records) may be internally

generated or maintained, therefore, before this approach can be used, controls
over cash receipts and recording need to be evaluated as effective.

· The quality of the audit evidence depends upon whether the receipts can be
related to specific receivables; and

· It will only provide limited assurance concerning the timely recording of the
receivable and the completeness of recorded receivables.

In some situations, the terms available to customers for payment of debts may be
such that subsequent cash receipts for those debts are not due until after our
reporting deadline. Unless it is practical to perform our confirmation procedures at an
interim date, this could have the effect of precluding subsequent cash procedures
from consideration.

6.2 Examination of Sales Documentation and Other Evidence

When no cash is subsequently received relating to all or part of a balance selected for
confirmation, or if a remittance advice is not sufficiently detailed, we normally follow
up the balance by means of examination of sales documentation and other evidence.

The extent of such tests will depend upon whether the receivable is due for payment.
If it is overdue, then the non-receipt is an indication that the receivable may not be
valid or may not be recoverable and we would perform further procedures. Without
strong evidence regarding the existence and recoverability of the receivable, it is
normally evaluated as an error.

The principal limitations of examining sales documentation are that:

· Usually, all of the audit evidence is internally generated and maintained;

· The quality of the audit evidence depends heavily upon the effectiveness of the
systems which generated that information; and

· It will only provide limited assurance concerning the timely recording of the
receivable and the completeness of recorded receivables.

6.3 Receivables Settled Other than by Cash Payment

In some circumstances, receivables may be settled other than by making a cash
payment. For example, entries may be made to offset receivables from and payables
to the same (or related) parties; or other assets may be given in exchange.

In these cases, it will be necessary to evaluate the reliability of the evidence and
determine that, where applicable, appropriate external evidence is obtained. In
addition, if the entity offsets receivables from and payables to the same (or related)
parties, we need to establish that a right of offset exists and that such offsetting is
therefore appropriate.

7 Evaluating the results of the accounts receivable confirmation

After performing any alternative procedures, we evaluate the combined evidence

provided by the confirmations and the alternative procedures to determine whether it
is sufficient to achieve our audit objectives. In performing that evaluation, we
consider:

· The reliability of the confirmations and alternative procedures.

· The nature of any exceptions, including the quantitative and qualitative

implications of those exceptions.

· The evidence provided by other procedures we perform.

· Whether additional evidence is needed.

If the combined evidence provided by the confirmations, alternative procedures, and

other procedures is not sufficient, we request additional confirmations or perform
other tests, such as tests of details, to the extent needed to obtain the desired audit
assurance.

All items selected for confirmation that cannot be confirmed and for which alternative
procedures have not been performed are treated as though they are errors for the
purpose of concluding on the total balance of accounts receivable. This approach to
the evaluation of unconfirmed balances is necessary since the fact that no response
has been received may be an indication that the receivable is not valid or is not
recoverable.

We determine whether significant and/or frequently recurring differences may be

indicative of a pattern of errors in the unconfirmed accounts. If our investigation of
the responses indicates a pattern of misstatements, we reconsider the judgments we
made in planning our approach and our combined risk assessments, and the effect on
our planned audit procedures.
When evaluating errors, we refer to E05_Exhibit 6 Identifying Audit Differences and
Prepare a Summary of Audit Differences (C02) in EY GAM for guidance about
projecting errors, aggregating audit differences, and evaluating the materiality of
audit differences.

8 Electronic responses

Responses received electronically, for example by fax or electronic mail, involve risks
as to reliability because proof of origin and authority of the respondent may be
difficult to establish, and alterations may be difficult to detect.

To mitigate these risks, we may be able to use a formal process – usually coordinated
by an independent third party - that creates a secure environment for responses
received electronically. If we are satisfied that such a process is secure and properly
controlled, the reliability of the related responses is enhanced. An electronic
confirmation process might incorporate various techniques for validating the identity
of a sender of information in electronic form, for example, through the use of
encryption, electronic digital signatures, and procedures to verify web site
authenticity, to address the risks that:

· The response may not be from the proper source;

· A respondent may not be authorized to respond; and

· The integrity of the transmission may have been compromised.

9 Confirming Terms

We may encounter unusual or complex transactions, or circumstances or evidence

establishing or suggesting that terms granted to customers differ from the terms
shown in the entity’s records (for example, we may encounter evidence of oral
modifications to agreements, such as unusual payment terms or liberal rights of
return).

When we believe there is a moderate or high degree of risk that there may be
unrecorded significant modifications to terms granted to customers, we consider
requesting customers to confirm both the terms of sale and whether any
modifications exist. We make such requests of all customers to whom requests for
confirmation of balances are sent, or other appropriate selected customers. The
requests are made in separate letters because persons responsible for responding to
requests for confirmation of balances ordinarily are not knowledgeable about terms of
purchase.
10 Use of Negative Confirmations for accounts receivable confirmations

Negative Confirmation

The negative form of confirmation requests the customer to respond only if the
customer disagrees with the information stated on the request. Consequently,
negative confirmations provide less persuasive audit evidence than positive
confirmations. Negative confirmation requests may be used to obtain audit assurance
when:

· We have performed full tests of controls and have determined that the controls
relevant to the assertion were operating effectively (i.e., we have assessed the
risk of material misstatements as minimal or low).

· A large number of small homogeneous balances is involved.

· A very low exception rate is expected.

· We are not aware of circumstances that cause us to believe that the customers
are likely to disregard the confirmation requests.

We do not use negative confirmation requests as the sole substantive audit procedure
to address an assessed risk of material misstatement at the assertion level unless all
of the above are present.

Negative confirmations are not used, for example, for key items or when using
variables estimation sampling.

We satisfy ourselves that customers are likely to give adequate consideration to

negative confirmation requests by considering the results of positive confirmation
procedures performed in prior years on the engagement or on similar engagements,
or by sending some positive confirmation requests as well as the negative
confirmation requests.

If negative confirmations are used, the number of requests sent or the extent of other
auditing procedures applied normally is greater than would be the case if positive
confirmations are used in order for us to obtain the same degree of satisfaction.

Negative confirmations may provide some evidence of the existence of third parties if
they are not returned with an indication that the addressees are unknown. However,
negative confirmations provide less persuasive audit evidence than positive
confirmations because failure to receive a response to a negative confirmation
request does not explicitly indicate receipt by the intended customer or verification of
the accuracy of the information contained in the request. Also, customers may be
more likely to respond indicating their disagreement with a confirmation request
when the information in the request is not in their favor, and less likely to respond
otherwise.

Consequently, it is unlikely that using a negative confirmation for accounts receivable

will provide sufficient audit evidence on its own. However, a negative confirmation
may be used in conjunction with a positive confirmation in a stratified population to
sample the small, low risk balances left in a population where key items and large
balances have been confirmed using positive confirmation.

Appendix 2 – Additional Illustrative Procedures to

Consider for Accounts Receivable, Trade Regardless of
Risk Assessment
This appendix sets out examples of general and analytical procedures that may be
appropriate when auditing accounts receivable, trade.

General Procedures

Examine details of accounts or notes receivable from officers, directors, shareholders, and
other related parties; investigate unusual items as well as significant reductions or increases
at the balance sheet date; determine that necessary disclosures are made.

Obtain listings of receivables sold with recourse; confirm with both the debtors and the person
or entity owning or having rights in the receivables; evaluate contingencies arising from such
sales; determine that the necessary disclosures are made.

Review minutes, loan agreements, and other documents for evidence of liens, pledges, or
other security interests in receivables; determine that necessary disclosures are made.

Test the timing and amount of year end revenue recognition by tracing to long-term contracts,
service agreements, license agreements, or other appropriate documentation to detect errors
and/or estimate amount of incorrect revenue recorded. Review year end cost and progress
estimation procedures.

Determine that revenue recorded under “bill and hold” agreements results only from
accommodations to customers under normal credit terms; confirm that title has passed at the
date of revenue recognition.

Review evidence or obtain information concerning credit worthiness for large new accounts.

Inquire about management, salespersons, or others receiving products without billing or

payment.

For large or unusual sales contracts uncompleted at year end, request confirmation from
customers as to pricing, discount, payment, and warranty terms.

Analytical Procedures

Compare year end trade receivable profile with prior year and investigate significant changes.
If appropriate, review individual customers or components.

Compare the composition of the ledger (transactions and customer balances) and understand
any changes/absence of changes in volume, value and mix of credit and debit amounts.

Understand the reason for any large credit transactions/balances on the ledger.

Review the list of major customers and those major customers with older debts (e.g., older
than 90 (or selected) days. Gain an explanation from management for any significant
changes from prior year.

Review volatility of customer base (e.g. new customers as a percentage of existing customers)
and compare with our expectations.

Compare the aged listing of accounts receivable with those of prior periods and note any
significant changes (e.g., changes in major customers, in major customers’ balances in the
percentage of overdue accounts, in the proportion of credit balances, etc.).

Compare the current period’s accounts written off and the allowance and provision for
doubtful accounts as percentages of accounts receivable and sales with prior periods’
percentages. Evaluate trends in light of current economic conditions.

Compare current year’s to prior year’s allowance for doubtful accounts as a percentage of (a)
accounts receivable and (b) sales.

Compare the current period’s receivables as a percentage of net sales with prior periods’
percentages, and consider the reasonableness of the current period’s percentage in relation to
current economic conditions, credit policies, collectability, etc.

Compare the current period’s accounts receivable turnover and number of days’ sales
outstanding with prior amounts, and consider the reasonableness of the current period’s
amounts in relation to current economic conditions, credit policies, collectability, etc.

Compare the aging with the entity’s and with the industry’s collection practices.

Compare the current period’s sales returns and sales discounts as percentages of sales by
product line with prior periods’ percentages. Investigate significant fluctuations.

Compare the current period’s allowance for unissued credits as a percentage of total credits
issued and accounts receivable with prior periods’ percentages. Investigate significant
fluctuations.
Compare the number and amounts of credits issued with those of prior periods.

Appendix 3 – Illustrative Procedures for Accounts

Receivable, Trade Responsive to Risk Assessment

The following are examples of procedures that may, together with, or in place of, the
procedures previously discussed, be useful in achieving the primary account balance
audit objectives when our evaluation of classes of routine transactions indicates
possible errors.

Sales applications

1. Account for the numerical sequence of sales invoices, sales orders, and
shipping documents during a specified period. Reconcile billings with
shipping documents for a substantial portion of the period.

2. Test the records of products ordered and shipped to the sales records; agree
dates, customers, products, quantities, prices, and amounts.

3. Test the posting of individual sales invoices to the sales register and to the
customers’ ledger.

4. Test recorded sales to the records of products ordered and shipped; agree
dates, customers, products, quantities, prices, and amounts.

5. Review the listing of accounts receivable and investigate unusual balances,

credit balances, and accounts that may not be accounts receivable or may
not be properly classified as accounts receivable, trade (e.g., consignment
accounts, related party or employee accounts).

6. Investigate large or unusual credit memos issued subsequent to the balance

sheet date.

7. Test the pricing and mathematical accuracy of sales invoices.

8. Test the accounting classification of sales transactions.

 9. Review the accounts receivable, sales, and returns and allowances accounts
in the general ledger for unusual items.

10. Review the sales register, the sales returns and allowances register, and the
cash receipts register for unusual items; investigate any such items
observed.

11. Test the mathematical accuracy of the sales register.

12. Trace the accounts receivable to the customers’ ledger; investigate

reconciling items.

13. Test the postings of the totals in the sales register to the general ledger and
the customers’ ledger.

Sales returns and allowances (credit memos) application

14. Compare credit memos and supporting documents with the sales returns and
allowances register as to dates, customers, products, quantities, prices, and
amounts.

15. Account for the numerical sequence of credit memos during a specified
period.

16. Test the posting of individual credit memos to the sales returns and
allowances register and to the customers’ ledger.

17. Compare recorded credit memos with the documents supporting returns and
allowances as to dates, customers, products, quantities, prices, and
amounts.

18. Test credit postings in the customers’ ledger to the cash receipts ledger or
approved credit.

19. Test the authorization of credits, discounts, and allowances shown in the
cash receipts register.

20. Test the pricing and mathematical accuracy of credit memos (e.g., trace
information to terms and recording of original sales).
 21. Test the cutoff in processing credits and allowances granted to customers by
examining credit memos issued and recorded before and after year end.

22. Test the timeliness with which credits granted to customers are processed.

23. Test the accounting classification of credit memos.

24. Test the mathematical accuracy of the sales returns and allowances register.

25. Test the postings of the totals in the sales returns and allowances register to
the general ledger and the customers’ ledger.

Cash receipts application

The following procedures have been written in the context of a check-based banking
system:

26. Compare remittance advices or lists of cash receipts with the entries in the
cash receipts register as to date, remitter, amount, and account
distribution.

27. Compare the details of duplicate deposit slips with the entries in the cash
receipts register. Investigate abnormal delays in depositing cash receipts.

28. Compare the total amounts of the daily deposits shown on the bank
statements with the totals of the daily cash receipts shown in the cash
receipts register. Investigate unusual delays in depositing cash receipts and
any splitting of daily cash receipts into separate deposits.

29. Compare the entries in the cash receipts register (e.g., date, remitter,
amount, and account distribution) with the remittance advices, lists of cash
receipts, duplicate deposit slips, and bank statements.

30. Test the accounting classifications of cash receipts.

31. Test the mathematical accuracy of the cash receipts register.

32. Test the postings of the totals in the cash receipts register to the general
 ledger, customers’ ledger, and other subsidiary ledgers.

33. Test the posting of individual cash receipts from the cash receipts register
and supporting documents to the customers’ ledger.

34. Examine the entity’s bank reconciliations. When appropriate (e.g., to

determine whether receipts or disbursements are recorded on a timely
basis, or to verify the appropriateness of reconciling items), obtain cutoff
bank statements.

35. Test cutoff of cash receipts, disbursements, and transfers at the balance
sheet date.

Procedures responsive to possible errors — sales application

Primary Substantive Other Substantive

1 2 3
Assertion Possible Error Procedure Procedure

E Debits to customers are not E2, E3, E4, E5, E6 1, 4, 5, 6

represented by goods shipped.

E Debits to accounts receivable E1, E2, E3 5, 8, 9, 10

accounts are not accounts
receivable.

V Charges to customers are E2, E3, E5, E6 6, 7

incorrectly computed.

C Goods shipped to customers are E1, E4 1, 2, 3

not recorded.

C Current or subsequent sales are E1, E2, E3, E4

recorded in the wrong period.

C All sales on credit terms are not E1, E2, E3 8

debited to accounts receivable.

C Sales register is not correctly 11, 12

totaled.

C Totals in sales register are not 12, 13

correctly posted to the general
ledger.

C Sales invoice information is not E2, E3 3

correctly posted to sales journal.
 C Information in sales register is E1, E2, E3 3, 12, 13
not correctly posted to
customer’s ledger.

V Debits to customers in foreign E7

currencies are incorrectly valued.

Procedures responsive to possible errors — sales returns and allowances (credit

memos) application

Primary Substantive Other Substantive

1 2 3
Assertion Possible Error Procedure Procedure

E Credits to customers for returns E2, E3, E5, E6 6, 14, 15, 16

or allowances are not recorded.

E All returns and allowances E2, E3 16, 23

related to accounts receivable
are not credited to accounts
receivable accounts.

V Returns or allowances issued are E2, E3, E8 3, 5, 19, 20

incorrectly computed.

C Credits issued to customers are E8 15, 17, 18, 19

not supported by returned goods
or approved allowances.

C Returns or allowances are E2, E3 6, 21, 22

recorded in the wrong period.

C Credits to accounts receivable E2, E3 9, 10, 17, 18, 23

accounts are not for reductions
of accounts receivables.

C Credit memo register is not 12, 24

correctly totaled.

C Totals in the credit memo 12, 25

register are not correctly posted
to general ledger.

C Credit memo information is not 16

correctly posted to credit memo
register.

C Information in credit memo E2, E3 12, 25

register is not correctly posted to
customers’ ledger account.

Procedures responsive to possible errors — cash receipts application

 Primary Substantive Other Substantive
Assertion
1 2 3
Possible Error Procedure Procedure

E Cash receipts from customers E1, E2, E3, E5, E6 26, 27, 28, 34
are not recorded.

E All cash receipts related to E1, E2, E3 30

accounts receivable are not
credited to accounts receivable
accounts.

V Cash receipts credited to E2, E3 18, 26, 27, 28, 29, 34

customers do not agree with
amount deposited.

C Cash receipts credited to 18, 19, 28, 29, 34

customers were not actually
received.

C Cash receipts are recorded in the E1, E2, E3 34, 35

wrong period.

C Credits to accounts receivable E2, E3 9, 10, 18

accounts are not for reduction of
accounts receivable.

C Cash receipts register is not 12, 31, 34

correctly totaled.

C Totals in the cash receipts 12, 31, 34

register are not correctly posted
in the general ledger.

C Cash receipts information is not E2, E3 26, 27, 28, 29, 34

correctly posted to the cash
receipts register.

C Information in the cash receipts E2, E3 12, 32, 33

register is not correctly posted to
customer’s ledger account.

1 The Assertion column refers to the relevant financial statement assertion –

E=Existence; C=Completeness; and V=Valuation.

2 The Primary Substantive Procedure column refers to the Primary Substantive

Procedures listed in EY GAM S11 Exhibit 1 Appendix A: Primary Substantive
Procedures (PSP) by Account, which are also discussed in subsection 3 Primary
Substantive Procedures Applicable to Accounts Receivable, Trade above.

3 The Other Substantive Procedure column refers to the numbered procedures set
out in this appendix.

1 The Assertion column refers to the relevant financial statement assertion –

E=Existence; C=Completeness; and V=Valuation.

2 The Primary Substantive Procedure column refers to the Primary Substantive

Procedures listed in EY GAM S11 Exhibit 1 Appendix A: Primary Substantive
Procedures (PSP) by Account, which are also discussed in subsection 3 Primary
Substantive Procedures Applicable to Accounts Receivable, Trade above.

3 The Other Substantive Procedure column refers to the numbered procedures set
out in this appendix.

1 The Assertion column refers to the relevant financial statement assertion –

E=Existence; C=Completeness; and V=Valuation.

2 The Primary Substantive Procedure column refers to the Primary Substantive

Procedures listed in EY GAM S11 Exhibit 1 Appendix A: Primary Substantive
Procedures (PSP) by Account, which are also discussed in subsection 3 Primary
Substantive Procedures Applicable to Accounts Receivable, Trade above.
3 The Other Substantive Procedure column refers to the numbered procedures set
out in this appendix.

Go To Document ID: GSAM 5.4

Last Modified Date: 14 Dec 2009