©2010 prentice hall business publishing, auditing 13/e, arens//elder/beasley 16 - 1 completing the...
TRANSCRIPT
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 1
Completing the TestsCompleting the Testsin the Sales and Collection Cycle:in the Sales and Collection Cycle:
Accounts ReceivableAccounts Receivable
Chapter 16Chapter 16
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 22
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.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 33
Accounts Receivable Balance-Accounts Receivable Balance-related Audit Objectivesrelated Audit Objectives
1. Detail tie-in
7. Realizable value
5. Classification
4. Accuracy
2. Existence
8. Rights
3. Completeness
6. Cutoff
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 44
Identify client businessrisks affecting
accounts receivable
Methodology for Designing TestsMethodology for Designing Testsof Details of Balances for A/Rof Details of Balances for A/R
Set tolerable misstatementand assess inherent riskfor accounts receivable
Assess control risk forsales and collection cycle
Phase I
Phase I
Phase I
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 55
Methodology for Designing TestsMethodology for Designing Testsof Details of Balances for A/Rof Details of Balances for A/R
Design and performtests of controls and
substantive testsof transactions
for the sales andcollection cycle
Phase II
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 66
Timing
Items to select
Sample size
Audit procedures
Methodology for Designing TestsMethodology for Designing Testsof Details of Balances for A/Rof Details of Balances for A/R
Design and performanalytical procedures
for accountsreceivable balance
Design tests ofdetails of accountsreceivable balance
to satisfybalance-relatedaudit objectives
Phase III
Phase III
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 77
Relationship Between Sales Relationship Between Sales and Accounts Receivableand Accounts Receivable
ACCOUNTS RECEIVABLEBALANCE-RELATEDAUDIT OBJECTIVES
Translation-relatedaudit objectives
Sales
Occurrence
Completeness
Accuracy
Posting andsummarization
Classification
Timing
De
tail
tie-
in
Ex
iste
nce
Co
mp
lete
ne
ss
Ac
cu
rac
y
Cla
ssif
ica
tio
n
Cu
toff
Re
aliz
able
val
ue
Rig
hts
××
×
×
×
×
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 88
Relationship Between Sales Relationship Between Sales and Accounts Receivableand Accounts Receivable
ACCOUNTS RECEIVABLEBALANCE-RELATEDAUDIT OBJECTIVES
Translation-relatedaudit objectivesCash receipts
Occurrence
Completeness
Accuracy
Posting andsummarization
Classification
Timing
De
tail
tie-
in
Ex
iste
nce
Co
mp
lete
ne
ss
Ac
cu
rac
y
Cla
ssif
ica
tio
n
Cu
toff
Re
aliz
able
val
ue
Rig
hts
××
×
×
×
×
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 99
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.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 1010
Analytical Procedures for the Analytical Procedures for the Sales and Collection CycleSales and Collection Cycle
Gross margin percentage withprevious years
Sales by month over time Sales returns and allowances
as a percentage of gross saleswith previous years
Compare by product line:
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 1111
Analytical Procedures for the Analytical Procedures for the Sales and Collection CycleSales and Collection Cycle
Individual customer balances overa stated amount
Bad debt expense as a percentageof gross sales
Days that accounts receivableare outstanding
Compare with previous years:
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 1212
Analytical Procedures for the Analytical Procedures for the Sales and Collection CycleSales and Collection Cycle
Aging category as a percentageof receivables
Allowance for uncollectible accounts asa percentage of accounts receivable
Write-off of uncollectible accounts as apercentage of total accounts receivable
Compare with previous years:
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 1313
Selected Comparative Selected Comparative InformationInformation
SalesGross marginAccounts receivableBad debt expenseTotal current assetsTotal assetsNet earningsNumber of accounts receivableNumber of accts. rec. with balances over $100,000
144,328 39,845 20,197 3,323 51,027 61,367 5,681
258
37
9.0 9.6 7.3 (2.1)14.0 (7.0)21.9
16.7
15.6
132,421 36,350 18,827 3,394 44,779 66,021 4,659
221
32
7.0 7.014.1 7.3 6.6 8.039.0
5.7
6.7
123,737 33,961 16,505 3,162 41,989 61,147 3,351
209
30
12/31/09($000)
Percentchange2008-2009
12/31/08($000)
Percentchange2007-2008
12/31/07($000)
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 1414
Analytical Procedures: Sales Analytical Procedures: Sales and Collection Cycleand Collection Cycle
Gross margin/net salesSales returns and allowances/ gross salesBad debt expense/net salesAllowance for uncollectible accounts/accounts receivableNumber of days receivables outstandingNet accounts receivable/ current assets
27.85%
0.90% 2.30%
6.10%
48.09
37.20%
27.70%
0.90% 2.60%
7.50%
47.96
32.50%
27.68%
0.90% 2.60%
6.40%
49.32
32.30%
12/31/0912/31/09 12/31/0812/31/08 12/31/0712/31/07
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 1515
Design and Perform Tests of Details Design and Perform Tests of Details of A/R Balance (Phase III)of A/R Balance (Phase III)
Planned detection risk for eachobjective is an auditor decision
Combining the factors that determineplanned detection risk is complex
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 1616
Learning Objective 3Learning Objective 3
Design and perform tests ofDesign and perform tests of
details of balances for accountsdetails of balances for accounts
receivable. receivable.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 1717
Designing Tests of DetailDesigning Tests of Detailof Balancesof Balances
Accounts receivable are correctly added andagree with the Master File and the GeneralLedger (aged trial balance).
Recorded accounts receivable exist
Existing accounts receivable are included
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 1818
Designing Tests of DetailDesigning Tests of Detailof Balancesof Balances
Accounts receivable are accurate
Accounts receivable are properly classified
Cutoff for accounts receivable is correct
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 1919
Designing Tests of DetailDesigning Tests of Detailof Balancesof Balances
Accounts receivable is stated atrealizable value
The client has rights to accounts receivable
Accounts receivable presentation anddisclosure
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 2020
Learning Objective 4Learning Objective 4
Obtain and evaluate accountsObtain and evaluate accounts
receivable confirmations.receivable confirmations.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 2121
Confirmations Are Required, Confirmations Are Required, Except When:Except When:
1. Accounts receivable are immaterial.
2. The auditor considers confirmationsineffective evidence because responserates will likely be inadequate or unreliable.
3. The combined level of inherent risk andcontrol risk is low and other substantiveevidence can be accumulated to providesufficient evidence.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 2222
Type of ConfirmationType of Confirmation
Positive confirmation
Blank confirmation form
Invoice confirmation
Negative confirmation
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 2323
TimingTiming
The most reliable evidence from confirmationsis obtained when they are sent as close to thebalance sheet date as possible.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 2424
Sample SizeSample Size
Tolerable misstatement
Inherent risk
Control risk
Achieved detection risk fromother substantive tests
Type of confirmation
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 2525
Maintaining ControlMaintaining Control
After the items for confirmation have beenselected, the auditor must maintain controlof the confirmations until they are returnedfrom the customer.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 2626
Follow-up on NonresponsesFollow-up on Nonresponses
When positive confirmations are used,AU 330 requires follow-up proceduresfor confirmations not returned by the customer.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 2727
Subsequent Cash ReceiptsSubsequent Cash Receipts
Evidence of the receipt of cash subsequentto the confirmation date includes examiningremittance advices, entries in the cashreceipts records, or perhaps evensubsequent credits in the accountsreceivable master file.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 2828
Duplicate Sales InvoicesDuplicate Sales Invoices
These are useful in verifying the actualissuance of a sales invoice and theactual date of the billing.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 2929
Shipping DocumentsShipping Documents
These are important in establishingwhether the shipment was actuallymade and as a test of cutoff.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 3030
Analysis of DifferenceAnalysis of Difference
Payment has already been made
Goods have not been received
The goods have been returned
Clerical errors and disputed accounts
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 3131
Drawing ConclusionsDrawing Conclusions
Reevaluate internal control
Evaluate the qualitative nature ofmisstatements
Determine whether sufficient evidencewas obtained
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 3232
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.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 16 - 3333
Source of Each Row in the Source of Each Row in the Evidence Planning WorksheetEvidence Planning Worksheet
Tolerable misstatement Acceptable audit risk Inherent risk Control risk Substantive tests of transactions results Analytical procedures Planned detection risk and planned audit evidence
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 16 - 34
End of Chapter 16End of Chapter 16