8/09/2016
Methodology for Designing Tests of
Balances: Accounts Receivable
Topic 8
Phase I
Completing the
Tests in the Sales
and Collection
Cycle:
Accounts
Receivable
Phase II
Identify Client
Design and perform
business risks affecting tests of control and
Accounts Receivable
substantive tests of
transaction for Sales
and Collection Cycle
Audit Objectives
Auditor should make additional inquiries of
management
Managements responses should be critically
evaluated.
Rights
Realisable
Value
When analytical procedures in the sales and
collection cycle uncover unusual fluctuations:
Cut Off
Before tests of details of balances.
Posting and
Summarisation
Classification
After balance date
Accuracy
Accuracy
Most analytical procedures performed during the
detailed testing phase:
Completeness
Completeness
Occurrence
Existence
Designing and Performing Analytical Procedures
Cash Receipts
Timing
Detail Tie In
Rights
Realisable
Value
Cut Off
Classification
Accounts Receivable
Accuracy
Completeness
Completeness
Existence
Detail Tie In
Sales
Occurrence
Classification
Audit Procedures
Sample Size
Items to Select
Timing
Audit Objectives
Accounts Receivable
Design tests of detail
of Accounts Receivable
balance to satisfy
balance-related
account objectives
Assess Control Risk for
Sales and Collection
cycle
PowerPoint to accompany:
Posting and
Summarisation
Design and perform
analytical procedures
for Accounts
Receivable
Set Tolerable error and
assess inherent risk for
Accounts Receivable
(Chapter 13)
Accuracy
Phase III
Classification
Timing
Analytical Procedures for the
Sales and Collection Cycle
Compare by product line:
Gross margin percentage with previous years
Sales returns and allowances as a percentage of gross
sales with previous years.
Sales by month over time
Compare with previous years:
Individual customer balances over a stated amount
Days that accounts receivable are outstanding.
Bad debt expense as a percentage of gross sales
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Analytical Procedures for the
Sales and Collection Cycle (cont.)
Compare with previous years:
Ageing categories as a percentage of accounts
receivable
Allowance for doubtful debts as a percentage of
accounts receivable
Write-off of uncollectible accounts as a percentage of
total accounts receivable.
Designing Tests of Details of Balances (cont)
Accounts receivable are properly classified.
Cutoff for accounts receivable is correct.
Accounts receivable are stated at realisable
value:
o
Allowance for doubtful debts
Bad debts expense.
The client has rights to accounts receivable.
Designing Tests of Details of Balances
Accounts receivable are correctly added and agree with:
o
Recorded accounts receivable exist:
o
Positive confirmation:
Requests the debtor to confirm whether the balance
on the confirmation request is correct or incorrect.
Invoice confirmation:
Individual invoice is confirmed, rather than the
customers entire balance.
Negative confirmation:
Requests the debtor to respond only when there is
disagreement with the stated amount.
Confirmation of customer balances.
Existing accounts receivable are included.
Accounts receivable are accurate.
Confirmation of Accounts Receivable
Confirmations are commonly used in practice, except
where:
Accounts receivable presentation and disclosure.
Types of Confirmation
The master file (subsidiary ledger) and general
ledger.
Accounts receivable are immaterial
Auditor considers confirmations ineffective evidence
because response rates may be inadequate or
unreliable
Combined level of inherent risk and control risk is low
and other substantive evidence can be accumulated
to provide sufficient evidence.
Confirmations - Timing
Most reliable evidence from confirmations is obtained
when:
They are sent as close to the balance sheet date as
possible.
Often necessary to confirm the accounts at an interim
date:
Permissible if internal controls are adequate.
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Confirmation - Sample Size
Selection of Items for Testing
Main factors affecting sample size:
Audit focus is on overstatement of receivables, so
stratification is desirable:
Tolerable error
Inherent risk
Control risk
Achieved detection risk from other substantive tests
Type of confirmation.
Analysis of differences:
Must ensure independent communication between
auditor and customer.
Payment has already been made
Second and third requests.
Goods have been returned
Goods havent been received
Clerical errors and disputed amounts.
Drawing conclusions
Alternative procedures:
(cont.)
Follow-up of non-responses:
Auditor should be careful to avoid being influenced by the
client.
Other Issues
Maintaining control:
Age of balance.
When selecting a sample of accounts receivable for
confirmation:
Other Issues
Dollar value
Subsequent cash receipts
Re-evaluate internal control
Shipping documents
Determine if sufficient evidence was obtained.
Duplicate sales invoices
Correspondence with the client.
Evidence Planning Worksheet
(Fig 13.7)
Evaluate the qualitative nature of errors
Lecture Example
Activity 13.27 (Arens et al., 2013)
(a)
(b)
Identify which procedures are tests of details of
balances, which are tests of controls, and which are
substantive tests of transactions
Identify one test of details and one test of control or
substantive test of transactions that will partially
satisfy each balance related audit objective.
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What Next ???
Topic 8:
Review Chapter 13
Ensure understand key terms and concepts
Review seminar slides & examples
Assigned Questions: 13.11, 13.23,13.25,13.26
Next Week:
Chapter 15: Audit of Transaction Cycles (Part 2).
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