Chapter 16 Completing the Tests in the Sales and Collection Cycle:

Transcription

1 Chapter 16 Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

2 Describe the methodology for designing tests of details of balances using the audit risk model. Design and perform analytical procedures for accounts in the sales and collection cycle. Design and perform tests of details of balances for accounts receivable. 16-2

3 Obtain and evaluate accounts receivable confirmations. Design audit procedures for the audit of accounts receivable, using the evidence planning worksheet as a guide. 16-3

4 1 Describe the methodology for designing tests of details of balances using the audit risk model. 16-4

5 Detail tie-in Existence Rights Completeness A/R Audit Objectives Realizable value Accuracy Classification Cutoff 16-5

6 Phase I Identify client business risks affecting Accounts Receivable Set performance materiality and assess inherent risk for accounts receivable Assess control risk for sales and collection cycle 16-6

7 Phase II Design and perform tests of controls and substantive tests of transactions for the sales and collection cycle 16-7

8 Phase III Design and perform analytical procedures for accounts receivable Design tests of details of accounts receivable balance to satisfy balance-related objectives Audit procedures Sample size Items to select Timing 16-8

9 Detail tie-in Existence Completeness Accuracy Classification Cutoff Realizable value Rights ACCOUNTS RECEIVABLE BALANCE-RELATED AUDIT OBJECTIVES Translation-related audit objectives Sales Occurrence Completeness Accuracy Posting and summarization Classification Timing 16-9

10 Detail tie-in Existence Completeness Accuracy Classification Cutoff Realizable value Rights ACCOUNTS RECEIVABLE BALANCE-RELATED AUDIT OBJECTIVES Translation-related audit objectives Cash receipts Occurrence Completeness Accuracy Posting and summarization Classification Timing 16-10

11 2 Design and perform analytical procedures for accounts in the sales and collection cycle

12 Compare by product line: Gross margin percentage with previous years Sales by month over time Sales returns and allowances as a percentage of gross sales with previous years 16-12

13 Compare with previous years: Individual customer balances over a stated amount Bad debt expense as a percentage of gross sales Days that accounts receivable are outstanding 16-13

14 Compare with previous years: Aging category as a percentage of receivables Allowance for uncollectible accounts as a percentage of accounts receivable Write-off of uncollectible accounts as a percentage of total accounts receivable 16-14

15 12/31/13 ($000) Percent change /31/12 ($000) Percent change /31/11 ($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, ,328 39,845 20,197 3,323 51,027 61,367 5, (2.1) 14.0 (7.0) ,421 36,350 18,827 3,394 44,779 66,021 4, ,737 33,961 16,505 3,162 41,989 61,147 3,

16 16-16

17 Planned detection risk for each objective is an auditor decision Combining the factors that determine planned detection risk is complex 16-17

18 3 Design and perform tests of details of balances for accounts receivable

19 Accounts receivable are correctly added and agree with the Master File and the General Ledger (aged trial balance). Recorded accounts receivable exist Existing accounts receivable are included 16-19

20 Accounts receivable are accurate Accounts receivable are properly classified Cutoff for accounts receivable is correct 16-20

21 Accounts receivable is stated at realizable value The client has rights to accounts receivable Accounts receivable presentation and disclosure 16-21

22 4 Obtain and evaluate accounts receivable confirmations

23 Auditing Standards United States International Required Except when: Confirmations not required Expected low response rate Low inherent & control risks Alternate Procedures 16-23

24 Positive confirmation Blank confirmation form Invoice confirmation Negative confirmation 16-24

25 16-25

26 Risk of material misstatement is low Large number of small account balances Expected low exception rate Expect adequate consideration from recipients 16-26

27 16-27

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

29 Performance materiality Inherent Risk Control Risk Sample Size factors Type of Confirmation Achieved Detection risk from other tests 16-29

30 The auditor should perform procedures to verify the addresses or addresses used for confirmation. Auditors must be responsible for mailing the confirmations and maintaining control of the confirmations until they are returned from the customer

31 When positive confirmations are used, Auditing standards require follow-up Procedures for confirmations not returned by the customer. Alternate Procedures Subsequent cash receipts Duplicate sales invoices Shipping documents

32 Payment-in-transit Shipment-in-transit The goods have been returned Errors and disputes 16-32

33 Reevaluate internal control Evaluate the qualitative nature of misstatements Determine whether sufficient evidence was obtained 16-33

34 5 Design audit procedures for the audit of accounts receivable, using an evidence planning worksheet as a guide

35 16-35

36 16-36

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