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Completing The Tests in The Sales and Collection Cycle: Accounts Receivable
Completing The Tests in The Sales and Collection Cycle: Accounts Receivable
Chapter 16
Learning Objective 1
Describe the methodology for designing tests of details of balances using the audit risk model.
Classification
Rights
Design and perform tests of controls and substantive tests of transactions for the sales and collection cycle.
Items to select
Timing
Completeness
Classification
Detail tie-in
Realizable value
Sales
Cutoff
Rights
Existence
Accuracy
Completeness
Classification
Detail tie-in
Realizable value
Cash receipts
Cutoff
Rights
Existence
Accuracy
Learning Objective 2
Design and perform analytical procedures for accounts in the sales and collection cycle.
Gross margin percentage with previous years Sales by month over time Sales returns and allowances as a percentage of gross sales with previous years
Individual customer balances over a stated amount Bad debt expense as a percentage of gross sales Days that accounts receivable are outstanding
Aging category as a percentage of receivables Allowance for uncollectible accounts as a percentage of accounts receivable Charge-off of uncollectible accounts as a percentage of total accounts receivable
12/31/02 ($000)
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
Learning Objective 3
Design and perform tests of details of balances for accounts receivable for each balancerelated audit objective.
Learning Objective 4
AICPA Requirements
1. Accounts receivable are immaterial.
2. The auditor considers confirmations ineffective evidence because response rates will likely be inadequate or unreliable. 3. The combined level of inherent risk and control risk is low and other substantive evidence can be accumulated to provide sufficient evidence.
Type of Confirmation
Positive confirmation Blank confirmation form Invoice confirmation Negative confirmation
Timing
The most reliable evidence from confirmations is obtained when they are sent as close to the balance sheet date as possible, as opposed to confirming the accounts several months before year-end.
Sample Size
Tolerable misstatement Inherent risk
Control risk
Achieved detection risk from other substantive tests Type of confirmation
When selecting a sample of accounts receivable for confirmation, the auditor should be careful to avoid being influenced by the client.
If a client tries to discourage the auditor from sending confirmations to certain customers, the auditor should consider the possibility that the client is attempting to conceal fictitious or known misstatements of accounts receivable.
Maintaining Control
After the items for confirmation have been selected, the auditor must maintain control of the confirmations until they are returned from the customer.
Follow-up on Nonresponses
When positive confirmations are used, SAS 67 requires follow-up procedures for confirmations not returned by he customer.
Evidence of the receipt of cash subsequent to the confirmation date includes examining remittance advices, entries in the cash receipts records, or perhaps even subsequent credits in the accounts receivable master file.
These are useful in verifying the actual issuance of a sales invoice and the actual date of the billing.
Shipping Documents
These are important in establishing whether the shipment was actually made and as a test of cutoff.
Usually, the auditor does not need to review correspondence as a part of alternative procedures, but correspondence can be used to disclose disputed and questionable receivables not uncovered by other means.
Analysis of Difference
Payment has already been made Goods have not been received The goods have been returned Clerical errors and disputed accounts
Drawing Conclusions
Learning Objective 5
Design audit procedures for the audit of accounts receivable, using an evidence planning worksheet as a guide.