3

Audit of Accounts/Notes
receivable and sales
transactions
 Auditors’ objectives
The objectives are to determine that:

1. Internal control over receivables is adequate

2. The recorded receivables are valid
3. All receivables are recorded
4. Records and supporting schedules are mathematically
correct
5. Receivables are valued at their NRV
6. Presentation and disclosure of receivables is adequate
Internal control over receivables
 Internal control over accounts receivables is
considered strong if different departments/
individuals are responsible for:

1. Processing of customers’ orders (Sales Dep’t)

2. Credit approval (Credit Dep’t)
3. Issuance of merchandise (Stores)
4. Shipment (Dispatch)
5. Billing
 …
7. Collection of receivables and, (Treasurer)
8. Write off of receivables (Accounts section)

 For notes receivables internal controls are

strong if:

1. Custodianship is separate from cash

2. The person that have the custody of notes does not
have the authority to renew notes.
Audit program for Receivables and sales
transactions
A. Consider internal control for receivables and sales
1. Obtain an understanding of internal control
2. Assess control risk and design additional tests of
control

3. Perform additional tests of control. These include:

a. Examine significant aspects of a sample of sales

transactions
 Helps to uncover if there had been lapping
activities or other irregularities
 Goods shipped on consignment
 Cash discounts
 …
b. Compare a sample of shipping documents to
related sales invoices- Helps to disclose orders
that have been shipped but not billed.

c. Review the use and authorization of credit memos

(sales returns and allowances)

d. Reconcile selected cash register tapes and sales

tickets with sales journal (For sales made for cash)

4. Reassess control risk and design substantive tests

 …
B. Substantive tests
5. Obtain an aged trial balance of accounts receivable and
analyses of trade accounts receivable and reconcile to ledger

A standard form of Aged trial balance appears as follows

Acct no. Customer Balance Aging based on invoice date

12/31/x8
0-30 days 31-60 days 61-90 days

01011 Adams PLC. 7329 4511 2818

01191 Goh Trading 4176 3676 500

09810 Tikur Abay Plc 5111 1811 1700 1600

1,432,000 1,225,000 92,286 73,000 41,714

 …

6. Obtain analyses of notes receivable and

related interest

7. Inspect/ Confirm notes with holders

8. Confirm receivables with debtors

 Negative and positive confirmations
 Sample size
 Non respondents
 …
9. Review the year end cut off of sales transactions

10. Perform analytical procedures for accounts receivable,

sales, notes receivable, and interest revenue. These
include:

 Compare sales figures of different months/quarters

 Prepare a statement showing the quantities of the
opening stock plus purchases minus sales during
each month of year
 Compare the year’s total sales with corresponding
figures for previous sales
 …
11. Verify interest earned on notes and accrued interest
receivable

 Interest accrued at beginning of year and Interest collected

during the year are used to verify interest earned and
interest receivable at end of year.

12. Determine adequacy of allowance for uncollectible accounts

 Post balance sheet collections of receivables give insight

as to collectibility of accounts receivables
 Credit standing of makers of notes is examined
 Collaterals supplied are evaluated
 …

13. Ascertain whether any receivables have been

pledged
 Analysis of interest expenses and bank confirmation help to
disclose accounts that have been pledged

14. Investigate account receivables with related parties

15. Evaluate financial statement presentation

16. Review propriety of client’s accounting for

transactions resulting in sales and receivables