2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Completing the Tests in the Sales and Collection Cycle: Accounts Receivable Chapter 16 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Learning Objective 1 Describe the methodology for designing tests of details of balances using the audit risk model. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Accounts Receivable Balance- related Audit Objectives Cutoff Detail tie-in Existence Rights Accuracy Classification A/R Audit Objectives Realizable value Completeness 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Methodology for Designing Tests of Details of Balances for A/R Phase I Set tolerable misstatement and assess inherent risk for accounts receivable Identify client business risks affecting Accounts Receivable Assess control risk for sales and collection cycle 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Methodology for Designing Tests of Details of Balances for A/R Phase II Design and perform tests of controls and substantive tests of transactions for the sales and collection cycle 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Methodology for Designing Tests of Details of Balances for A/R Phase III Sample size Design and perform analytical procedures for accounts receivable Design tests of details of accounts receivable balance to satisfy balance-related objectives Audit procedures Items to select Timing 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Relationship Between Sales and Accounts Receivable ACCOUNTS RECEIVABLE BALANCE-RELATED AUDIT OBJECTIVES Translation-related audit objectives Sales Occurrence Completeness Accuracy Posting and summarization Classification Timing Detail tie-inExistenceCompletenessAccuracyClassificationCutoff Realizable value Rights 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Relationship Between Sales and Accounts Receivable ACCOUNTS RECEIVABLE BALANCE-RELATED AUDIT OBJECTIVES Translation-related audit objectives Cash receipts Occurrence Completeness Accuracy Posting and summarization Classification Timing Detail tie-inExistenceCompletenessAccuracyClassificationCutoff Realizable value Rights 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Learning Objective 2 Design and perform analytical procedures for accounts in the sales and collection cycle. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Analytical Procedures for 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 Compare by product line: 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Analytical Procedures for the Sales and Collection Cycle Individual customer balances over a stated amount Bad debt expense as a percentage of gross sales Days that accounts receivable are outstanding Compare with previous years: 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Analytical Procedures for the Sales and Collection Cycle 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 Compare with previous years: 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Selected Comparative Information Sales Gross margin Accounts receivable Bad debt expense Total current assets Total assets Net earnings Number of accounts receivable Number of accts. rec. with balances over $100, ,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, /31/11 ($000) Percent change /31/10 ($000) Percent change /31/09 ($000) 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Analytical Procedures: Sales and Collection Cycle 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Design and Perform Tests of Details of A/R Balance (Phase III) Planned detection risk for each objective is an auditor decision Combining the factors that determine planned detection risk is complex 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Learning Objective 3 Design and perform tests of details of balances for accounts receivable. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Designing Tests of Detail of Balances Accounts receivable are correctly added and agree with the Master File and the General Ledger (aged trial balance). Recorded accounts receivable exist Existing accounts receivable are included 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Designing Tests of Detail of Balances Accounts receivable are accurate Accounts receivable are properly classified Cutoff for accounts receivable is correct 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Designing Tests of Detail of Balances Accounts receivable is stated at realizable value The client has rights to accounts receivable Accounts receivable presentation and disclosure 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Learning Objective 4 Obtain and evaluate accounts receivable confirmations. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Confirmation Requirements Auditing Standards United States International Required Except when: Low inherent & control risks Expected low response rate Confirmations not required Alternate Procedures 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Type of Confirmation Positive confirmation Blank confirmation form Invoice confirmation Negative confirmation 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Positive Confirmation 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Negative Confirmation Requirements Risk of material misstatement is low Large number of small account balances Expected low exception rate Expect adequate consideration from recipients 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Negative Confirmation 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Timing The most reliable evidence from confirmations is obtained when they are sent as close to the balance sheet date as possible. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Sampling Decisions Achieved Detection risk from other tests Tolerable misstatement Inherent Risk Type of Confirmation Sample Size factors Control Risk 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Verifying Addresses and Maintaining Control The auditor should perform procedures to verify the addresses oraddresses used for confirmation. Auditors must be responsible for mailing the confirmations and maintaining control of the confirmations until they are returned from the customer. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Follow-up on Nonresponses When positive confirmations are used, AU 330 requires follow-up procedures for confirmations not returned by the customer. Alternate Procedures Duplicate sales invoices Subsequent cash receipts Shipping documents 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Analysis of Differences Payment-in-transit Shipment-in-transit The goods have been returned Errors and disputes 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Drawing Conclusions Reevaluate internal control Evaluate the qualitative nature of misstatements Determine whether sufficient evidence was obtained 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Learning Objective 5 Design audit procedures for the audit of accounts receivable, using an evidence planning worksheet as a guide. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Evidence Planning Worksheet 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley End of Chapter 16