Auditing and assurance services 14e by arens chapter 16

Completing the Tests
in the Sales and Collection Cycle:
Accounts Receivable
Chapter 16
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

5-5


Learning Objective 1
Describe the methodology for designing
tests of details of balances using the audit
risk model.

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Accounts Receivable Balancerelated Audit Objectives
Detail tie-in
Rights

Existence

Completeness

A/R
Audit

Objectives

Realizable value

Cutoff

Accuracy
Classification
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Methodology for Designing Tests
of Details of Balances for A/R
Phase I

Identify client
business risks
affecting
Accounts
Receivable

Set tolerable
misstatement
and assess
inherent risk
for accounts
receivable

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Assess
control risk
for sales
and
collection
cycle
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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

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Methodology for Designing Tests
of Details of Balances for A/R
Phase III
Design and perform
analytical
procedures for

accounts receivable
Audit
procedures

Sample
size

Design tests of details
of accounts receivable
balance to satisfy
balance-related
objectives

Items to
select

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Timing
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Occurrence
Completeness
Accuracy
Posting and
summarization
Classification
Timing

×

×

Rights

Realizable
value

Cutoff

Classification

Accuracy

Sales

Completeness

Translation-related
audit objectives

Existence

ACCOUNTS RECEIVABLE
BALANCE-RELATED
AUDIT OBJECTIVES

Detail tie-in

Relationship Between Sales and
Accounts Receivable

×

×

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

×

×
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Occurrence
Completeness
Accuracy
Posting and
summarization
Classification
Timing

×

Rights

Realizable
value

Cutoff

Classification

Accuracy

Cash receipts

Completeness

Translation-related
audit objectives

Existence

ACCOUNTS RECEIVABLE
BALANCE-RELATED
AUDIT OBJECTIVES

Detail tie-in

Relationship Between Sales and
Accounts Receivable

×
×

×

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

×

×
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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

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Analytical Procedures for the
Sales and Collection Cycle
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

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Analytical Procedures for the
Sales and Collection Cycle
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

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Analytical Procedures for the
Sales and Collection Cycle
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

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Selected Comparative
Information
Percent

Percent
change
12/31/11 change 12/31/10 2009- 12/31/09
($000) 2010-11 ($000) 2010
($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 $100,000

144,328
39,845
20,197
3,323
51,027
61,367
5,681

9.0 132,421 7.0 123,737
9.6
36,350 7.0 33,961
7.3

18,827 14.1 16,505
(2.1)
3,394 7.3
3,162
14.0
44,779 6.6 41,989
(7.0) 66,021 8.0 61,147
21.9
4,659 39.0
3,351

258

16.7

221

5.7

209

37

15.6

32

6.7

30

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Analytical Procedures: Sales and
Collection Cycle

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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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

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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

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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

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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

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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

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Learning Objective 4
Obtain and evaluate accounts receivable
confirmations.

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Confirmation Requirements
Auditing Standards
United States

International

Required Except
when:

Confirmations not
required

Expected low
response rate
Low inherent &
control risks

Alternate
Procedures

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Type of Confirmation
 Positive confirmation
Blank confirmation form
Invoice confirmation
Negative confirmation

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Positive Confirmation

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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

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Negative Confirmation

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