Upload
rosalyn-rowland
View
53
Download
4
Tags:
Embed Size (px)
DESCRIPTION
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. Accounts Receivable Balance-Related Audit Objectives. Detail tie-in. Existence. - PowerPoint PPT Presentation
Citation preview
Completing the Tests in the Completing the Tests in the Sales and Collection Sales and Collection Cycle:Cycle:Accounts ReceivableAccounts Receivable
Chapter 16Chapter 16
Learning Objective 1Learning Objective 1
Describe the methodology forDescribe the methodology for
designing tests of details ofdesigning tests of details of
balances using the auditbalances using the audit
risk model.risk model.
Accounts Receivable Balance-Related Accounts Receivable Balance-Related Audit ObjectivesAudit Objectives
Detail tie-inDetail tie-inDetail tie-inDetail tie-in
RealizableRealizablevaluevalue
RealizableRealizablevaluevalue
ClassificationClassificationClassificationClassificationAccuracyAccuracyAccuracyAccuracy
ExistenceExistenceExistenceExistence
RightsRightsRightsRights
CompletenessCompleteness CompletenessCompleteness
Cutoff Cutoff Cutoff Cutoff
PresentationPresentationand disclosureand disclosurePresentationPresentation
and disclosureand disclosure
Identify client business risks affecting accountsIdentify client business risks affecting accountsreceivable.receivable.
Identify client business risks affecting accountsIdentify client business risks affecting accountsreceivable.receivable.
Methodology for Designing TestsMethodology for Designing Testsof Details of Balances for A/Rof Details of Balances for A/R
Phase IPhase IPhase IPhase I
Set tolerable misstatement and assess inherentSet tolerable misstatement and assess inherentrisk for accounts receivable.risk for accounts receivable.
Set tolerable misstatement and assess inherentSet tolerable misstatement and assess inherentrisk for accounts receivable.risk for accounts receivable.
Assess control risk for sales and collection cycle.Assess control risk for sales and collection cycle.Assess control risk for sales and collection cycle.Assess control risk for sales and collection cycle.
Methodology for Designing TestsMethodology for Designing Testsof Details of Balances for A/Rof Details of Balances for A/R
Design and perform tests of controls andDesign and perform tests of controls andsubstantive tests of transactions for thesubstantive tests of transactions for thesales and collection cycle.sales and collection cycle.
Design and perform tests of controls andDesign and perform tests of controls andsubstantive tests of transactions for thesubstantive tests of transactions for thesales and collection cycle.sales and collection cycle.
Phase IIPhase IIPhase IIPhase II
TimingTimingTimingTimingItems toItems toselectselect
Items toItems toselectselect
SampleSamplesizesize
SampleSamplesizesize
AuditAuditproceduresprocedures
AuditAuditproceduresprocedures
Methodology for Designing TestsMethodology for Designing Testsof Details of Balances for A/Rof Details of Balances for A/R
Design and perform analytical procedures forDesign and perform analytical procedures foraccounts receivable balance.accounts receivable balance.
Design and perform analytical procedures forDesign and perform analytical procedures foraccounts receivable balance.accounts receivable balance.
Phase IIIPhase IIIPhase IIIPhase III
Design tests of details of accounts receivableDesign tests of details of accounts receivablebalance to satisfy balance-related audit objectives.balance to satisfy balance-related audit objectives.
Design tests of details of accounts receivableDesign tests of details of accounts receivablebalance to satisfy balance-related audit objectives.balance to satisfy balance-related audit objectives.
Relationship Between Sales and Accounts Relationship Between Sales and Accounts ReceivableReceivable
Pre
sen
tati
on
Pre
sen
tati
on
an
d d
isc
losu
rea
nd
dis
clo
sure
De
tail
tie-
inD
eta
il ti
e-in
Ex
iste
nce
Ex
iste
nce
Co
mp
lete
ne
ss
Co
mp
lete
ne
ss
Ac
cu
rac
yA
cc
ura
cy
Cla
ssif
ica
tio
nC
lass
ific
ati
on
Cu
toff
Cu
toff
Re
aliz
able
Re
aliz
able
val
ue
val
ue
Rig
hts
Rig
hts
Accounts receivable balance-related audit objectivesAccounts receivable balance-related audit objectives
Translation-relatedTranslation-relatedaudit objectivesaudit objectives
SalesSales
ExistenceExistence
CompletenessCompleteness
AccuracyAccuracy
ClassificationClassification
TimingTiming
Posting/SummaryPosting/Summary
××××
××××
××××
Relationship Between Sales and Accounts Relationship Between Sales and Accounts ReceivableReceivable
Pre
sen
tati
on
Pre
sen
tati
on
an
d d
isc
losu
rea
nd
dis
clo
sure
De
tail
tie-
inD
eta
il ti
e-in
Ex
iste
nce
Ex
iste
nce
Co
mp
lete
ne
ss
Co
mp
lete
ne
ss
Ac
cu
rac
yA
cc
ura
cy
Cla
ssif
ica
tio
nC
lass
ific
ati
on
Cu
toff
Cu
toff
Re
aliz
able
Re
aliz
able
val
ue
val
ue
Rig
hts
Rig
hts
Accounts receivable balance-related audit objectivesAccounts receivable balance-related audit objectives
Translation-relatedTranslation-relatedaudit objectivesaudit objectivesCash receiptsCash receipts
ExistenceExistence
CompletenessCompleteness
AccuracyAccuracy
ClassificationClassification
TimingTiming
Posting/SummaryPosting/Summary
××××
××××
××××
Learning Objective 2Learning Objective 2
Design and perform analyticalDesign and perform analytical
procedures for accounts in theprocedures for accounts in the
sales and collection cycle.sales and collection cycle.
Analytical Procedures for the Sales and Analytical Procedures for the Sales and Collection CycleCollection Cycle
Gross margin percentage with previous yearsGross margin percentage with previous yearsGross margin percentage with previous yearsGross margin percentage with previous years
Sales by month over timeSales by month over timeSales by month over timeSales by month over time
Sales returns and allowances as a percentage ofSales returns and allowances as a percentage ofgross sales with previous yearsgross sales with previous years
Sales returns and allowances as a percentage ofSales returns and allowances as a percentage ofgross sales with previous yearsgross sales with previous years
Analytical Procedures for the Sales and Analytical Procedures for the Sales and Collection CycleCollection Cycle
Individual customer balances over a stated amountIndividual customer balances over a stated amountIndividual customer balances over a stated amountIndividual customer balances over a stated amount
Bad debt expense as a percentage of gross salesBad debt expense as a percentage of gross salesBad debt expense as a percentage of gross salesBad debt expense as a percentage of gross sales
Days that accounts receivable are outstandingDays that accounts receivable are outstandingDays that accounts receivable are outstandingDays that accounts receivable are outstanding
Analytical Procedures for the Sales and Analytical Procedures for the Sales and Collection CycleCollection Cycle
Aging category as a percentage of receivablesAging category as a percentage of receivablesAging category as a percentage of receivablesAging category as a percentage of receivables
Allowance for uncollectible accounts as aAllowance for uncollectible accounts as apercentage of accounts receivablepercentage of accounts receivable
Allowance for uncollectible accounts as aAllowance for uncollectible accounts as apercentage of accounts receivablepercentage of accounts receivable
Charge-off of uncollectible accounts as aCharge-off of uncollectible accounts as apercentage of total accounts receivablepercentage of total accounts receivable
Charge-off of uncollectible accounts as aCharge-off of uncollectible accounts as apercentage of total accounts receivablepercentage of total accounts receivable
Selected Comparative InformationSelected Comparative Information
SalesSalesGross marginGross marginAccounts receivableAccounts receivableBad debt expenseBad debt expenseTotal current assetsTotal current assetsTotal assetsTotal assetsNet earningsNet earningsNumber of accountsNumber of accounts receivablereceivableNumber of accts. rec. withNumber of accts. rec. with balances over $100,000balances over $100,000
144,328144,328 39,84539,845 20,19720,197 3,3233,323 51,02751,027 61,36761,367 5,6815,681
258258
3737
9.09.0 9.69.6 7.37.3 (2.1)(2.1)14.014.0 (7.0)(7.0)21.921.9
16.716.7
15.615.6
132,421132,421 36,35036,350 18,82718,827 3,3943,394 44,77944,779 66,02166,021 4,6594,659
221221
3232
7.07.0 7.07.014.114.1 7.37.3 6.66.6 8.08.039.039.0
5.75.7
6.76.7
123,737123,737 33,96133,961 16,50516,505 3,1623,162 41,98941,989 61,14761,147 3,3513,351
209209
3030
12/31/0412/31/04($000)($000)
PercentPercentchangechange2003-2003-20042004
12/31/0312/31/03($000)($000)
PercentPercentchangechange2002-2002-20032003
12/31/0212/31/02($000)($000)
Analytical Procedures: Sales and Analytical Procedures: Sales and Collection CycleCollection Cycle
Gross margin/net salesGross margin/net salesSales returns and allowances/Sales returns and allowances/ gross salesgross salesBad debt expense/net salesBad debt expense/net salesAllowance for uncollectibleAllowance for uncollectible accounts/accounts receivableaccounts/accounts receivableNumber of days receivablesNumber of days receivables outstandingoutstandingNet accounts receivable/Net accounts receivable/ current assetscurrent assets
27.85%27.85%
0.90%0.90% 2.30%2.30%
6.10%6.10%
48.0948.09
37.20%37.20%
27.70%27.70%
0.90%0.90% 2.60%2.60%
7.50%7.50%
47.9647.96
32.50%32.50%
27.68%27.68%
0.90%0.90% 2.60%2.60%
6.40%6.40%
49.3249.32
32.30%32.30%
12/31/0412/31/04 12/31/0312/31/03 12/31/0212/31/02
Design and Perform Tests of Details of A/R Design and Perform Tests of Details of A/R Balance (Phase III)Balance (Phase III)
Planned detection risk for each objectivePlanned detection risk for each objectiveis an auditor decision.is an auditor decision.
Planned detection risk for each objectivePlanned detection risk for each objectiveis an auditor decision.is an auditor decision.
Combining the factors that determineCombining the factors that determineplanned detection risk is complex.planned detection risk is complex.
Combining the factors that determineCombining the factors that determineplanned detection risk is complex.planned detection risk is complex.
Analytical Procedures for Gross MarginAnalytical Procedures for Gross Margin
HardwoodHardwoodSoftwoodSoftwoodPlywoodPlywood
36.336.323.923.940.340.3
20052005 20042004 20032003
32.432.422.022.050.150.1
36.436.420.320.344.244.2
32.532.522.122.154.354.3
36.036.020.520.545.445.4
32.332.322.322.355.655.6
Gross margin percentGross margin percent
GreatGreatWesternWestern IndustryIndustry
GreatGreatWesternWestern IndustryIndustry
GreatGreatWesternWestern IndustryIndustry
Learning Objective 3Learning Objective 3
Design and perform tests ofDesign and perform tests of
details of balances for accountsdetails of balances for accounts
receivable for each balance-receivable for each balance-
related audit objective.related audit objective.
Designing Tests of DetailDesigning Tests of Detailof Balancesof Balances
Accounts receivable are correctly added andAccounts receivable are correctly added andagree with the Master File and the Generalagree with the Master File and the GeneralLedger (Ledger (aged trial balanceaged trial balance).).
Accounts receivable are correctly added andAccounts receivable are correctly added andagree with the Master File and the Generalagree with the Master File and the GeneralLedger (Ledger (aged trial balanceaged trial balance).).
Recorded accounts receivable existRecorded accounts receivable existRecorded accounts receivable existRecorded accounts receivable exist
Existing accounts receivable are includedExisting accounts receivable are includedExisting accounts receivable are includedExisting accounts receivable are included
Designing Tests of DetailDesigning Tests of Detailof Balancesof Balances
Accounts receivable are accurateAccounts receivable are accurateAccounts receivable are accurateAccounts receivable are accurate
Accounts receivable are properly classifiedAccounts receivable are properly classifiedAccounts receivable are properly classifiedAccounts receivable are properly classified
Cutoff for accounts receivable is correctCutoff for accounts receivable is correctCutoff for accounts receivable is correctCutoff for accounts receivable is correct
Designing Tests of DetailDesigning Tests of Detailof Balancesof Balances
Accounts receivable is stated at realizable valueAccounts receivable is stated at realizable valueAccounts receivable is stated at realizable valueAccounts receivable is stated at realizable value
The client has rights to accounts receivableThe client has rights to accounts receivableThe client has rights to accounts receivableThe client has rights to accounts receivable
Accounts receivable presentation andAccounts receivable presentation anddisclosures are properdisclosures are proper
Accounts receivable presentation andAccounts receivable presentation anddisclosures are properdisclosures are proper
Learning Objective 4Learning Objective 4
Obtain and evaluate accountsObtain and evaluate accounts
receivable confirmations.receivable confirmations.
AICPA RequirementsAICPA Requirements
1.1. Accounts receivable are immaterial.Accounts receivable are immaterial.1.1. Accounts receivable are immaterial.Accounts receivable are immaterial.
2.2. The auditor considers confirmationsThe auditor considers confirmationsineffective evidence because responseineffective evidence because responserates will likely be inadequate or unreliable.rates will likely be inadequate or unreliable.
2.2. The auditor considers confirmationsThe auditor considers confirmationsineffective evidence because responseineffective evidence because responserates will likely be inadequate or unreliable.rates will likely be inadequate or unreliable.
3.3. The combined level of inherent risk andThe combined level of inherent risk andcontrol risk is low and other substantivecontrol risk is low and other substantiveevidence can be accumulated to provideevidence can be accumulated to providesufficient evidence.sufficient evidence.
3.3. The combined level of inherent risk andThe combined level of inherent risk andcontrol risk is low and other substantivecontrol risk is low and other substantiveevidence can be accumulated to provideevidence can be accumulated to providesufficient evidence.sufficient evidence.
Type of ConfirmationType of Confirmation
Positive confirmationPositive confirmationPositive confirmationPositive confirmation
Blank confirmation formBlank confirmation formBlank confirmation formBlank confirmation form
Invoice confirmationInvoice confirmationInvoice confirmationInvoice confirmation
Negative confirmationNegative confirmationNegative confirmationNegative confirmation
TimingTiming
The most reliable evidence from confirmationsThe most reliable evidence from confirmationsis obtained when they are sent as close to theis obtained when they are sent as close to thebalance sheet date as possible, as opposedbalance sheet date as possible, as opposedto confirming the accounts several monthsto confirming the accounts several monthsbefore year-end.before year-end.
The most reliable evidence from confirmationsThe most reliable evidence from confirmationsis obtained when they are sent as close to theis obtained when they are sent as close to thebalance sheet date as possible, as opposedbalance sheet date as possible, as opposedto confirming the accounts several monthsto confirming the accounts several monthsbefore year-end.before year-end.
Sample SizeSample Size
Tolerable misstatementTolerable misstatementTolerable misstatementTolerable misstatement
Inherent riskInherent riskInherent riskInherent risk
Control riskControl riskControl riskControl risk
Achieved detection risk fromAchieved detection risk fromother substantive testsother substantive tests
Achieved detection risk fromAchieved detection risk fromother substantive testsother substantive tests
Type of confirmationType of confirmationType of confirmationType of confirmation
Selection of the Items for TestingSelection of the Items for Testing
When selecting a sample of accounts receivableWhen selecting a sample of accounts receivablefor confirmation, the auditor should be carefulfor confirmation, the auditor should be carefulto avoid being influenced by the client.to avoid being influenced by the client.
When selecting a sample of accounts receivableWhen selecting a sample of accounts receivablefor confirmation, the auditor should be carefulfor confirmation, the auditor should be carefulto avoid being influenced by the client.to avoid being influenced by the client.
Selection of Items for TestingSelection of Items for Testing
If a client tries to discourage the auditor fromIf a client tries to discourage the auditor fromsending confirmations to certain customers,sending confirmations to certain customers,the auditor should consider the possibilitythe auditor should consider the possibilitythat the client is attempting to concealthat the client is attempting to concealfictitious or known misstatementsfictitious or known misstatementsof accounts receivable.of accounts receivable.
If a client tries to discourage the auditor fromIf a client tries to discourage the auditor fromsending confirmations to certain customers,sending confirmations to certain customers,the auditor should consider the possibilitythe auditor should consider the possibilitythat the client is attempting to concealthat the client is attempting to concealfictitious or known misstatementsfictitious or known misstatementsof accounts receivable.of accounts receivable.
Maintaining ControlMaintaining Control
After the items for confirmation have beenAfter the items for confirmation have beenselected, the auditor must maintain controlselected, the auditor must maintain controlof the confirmations until they are returnedof the confirmations until they are returnedfrom the customer.from the customer.
After the items for confirmation have beenAfter the items for confirmation have beenselected, the auditor must maintain controlselected, the auditor must maintain controlof the confirmations until they are returnedof the confirmations until they are returnedfrom the customer.from the customer.
Follow-up on NonresponsesFollow-up on Nonresponses
When positive confirmations are used,When positive confirmations are used,SAS 67 requires follow-up proceduresSAS 67 requires follow-up proceduresfor confirmations not returned by for confirmations not returned by he customer.he customer.
When positive confirmations are used,When positive confirmations are used,SAS 67 requires follow-up proceduresSAS 67 requires follow-up proceduresfor confirmations not returned by for confirmations not returned by he customer.he customer.
Subsequent Cash ReceiptsSubsequent Cash Receipts
Evidence of the receipt of cash subsequentEvidence of the receipt of cash subsequentto the confirmation date includes examiningto the confirmation date includes examiningremittance advices, entries in the cashremittance advices, entries in the cashreceipts records, or perhaps evenreceipts records, or perhaps evensubsequent credits in the accountssubsequent credits in the accountsreceivable master file.receivable master file.
Evidence of the receipt of cash subsequentEvidence of the receipt of cash subsequentto the confirmation date includes examiningto the confirmation date includes examiningremittance advices, entries in the cashremittance advices, entries in the cashreceipts records, or perhaps evenreceipts records, or perhaps evensubsequent credits in the accountssubsequent credits in the accountsreceivable master file.receivable master file.
Duplicate Sales InvoicesDuplicate Sales Invoices
These are useful in verifying the actualThese are useful in verifying the actualissuance of a sales invoice and theissuance of a sales invoice and theactual date of the billing.actual date of the billing.
These are useful in verifying the actualThese are useful in verifying the actualissuance of a sales invoice and theissuance of a sales invoice and theactual date of the billing.actual date of the billing.
Shipping DocumentsShipping Documents
These are important in establishingThese are important in establishingwhether the shipment was actuallywhether the shipment was actuallymade and as a test of cutoff.made and as a test of cutoff.
These are important in establishingThese are important in establishingwhether the shipment was actuallywhether the shipment was actuallymade and as a test of cutoff.made and as a test of cutoff.
Correspondence With the ClientCorrespondence With the Client
Usually, the auditor does not need to reviewUsually, the auditor does not need to reviewcorrespondence as a part of alternativecorrespondence as a part of alternativeprocedures, but correspondence canprocedures, but correspondence canbe used to disclose disputed andbe used to disclose disputed andquestionable receivables notquestionable receivables notuncovered by other means.uncovered by other means.
Usually, the auditor does not need to reviewUsually, the auditor does not need to reviewcorrespondence as a part of alternativecorrespondence as a part of alternativeprocedures, but correspondence canprocedures, but correspondence canbe used to disclose disputed andbe used to disclose disputed andquestionable receivables notquestionable receivables notuncovered by other means.uncovered by other means.
Analysis of DifferenceAnalysis of Difference
Payment has already been madePayment has already been madePayment has already been madePayment has already been made
Goods have not been receivedGoods have not been receivedGoods have not been receivedGoods have not been received
The goods have been returnedThe goods have been returnedThe goods have been returnedThe goods have been returned
Clerical errors and disputed accountsClerical errors and disputed accountsClerical errors and disputed accountsClerical errors and disputed accounts
Drawing ConclusionsDrawing Conclusions
Reevaluate internal control.Reevaluate internal control.Reevaluate internal control.Reevaluate internal control.
Evaluate the qualitative nature ofEvaluate the qualitative nature ofmisstatements.misstatements.
Evaluate the qualitative nature ofEvaluate the qualitative nature ofmisstatements.misstatements.
Determine whether sufficient evidenceDetermine whether sufficient evidencewas obtained.was obtained.
Determine whether sufficient evidenceDetermine whether sufficient evidencewas obtained.was obtained.
Learning Objective 5Learning Objective 5
Design audit procedures for theDesign audit procedures for the
audit of accounts receivable,audit of accounts receivable,
using an evidence planningusing an evidence planning
worksheet as a guide.worksheet as a guide.
Source of Each Row in the Evidence Source of Each Row in the Evidence Planning WorksheetPlanning Worksheet
Tolerable misstatementTolerable misstatement Acceptable audit riskAcceptable audit risk Inherent riskInherent risk Control riskControl risk Substantive tests ofSubstantive tests of transactions resultstransactions results Analytical proceduresAnalytical procedures Planned detection risk andPlanned detection risk and planned audit evidenceplanned audit evidence
Tolerable misstatementTolerable misstatement Acceptable audit riskAcceptable audit risk Inherent riskInherent risk Control riskControl risk Substantive tests ofSubstantive tests of transactions resultstransactions results Analytical proceduresAnalytical procedures Planned detection risk andPlanned detection risk and planned audit evidenceplanned audit evidence