Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
15
When More Isn’t Better
COMPLETING THE TESTS
IN THE SALES AND
COLLECTION CYCLE,
ACCOUNTS RECEIVABLE
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
METHODOLOGY FOR DESIGNING
TESTS OF DETAILS OF BALANCES
In designing tests of details of balances for accounts receivable,it is
essential to satisfy each of the nine balances-related audit objectives
first discussed in Chapter 6.
1,Detail tie-in
2,Existence
3,Completeness
4,Accuracy
5,Classification
6,Cutoff
7,Realizable value
8,Rights
9,Presentation
and disclosure
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Phase I
Set tolerable misstatement
and assess inherent risk
for accounts receivable
Assess control risk
for sales and
collection cycle
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Phase II
Design and perform tests
of controls and substantive
tests of transactions for the
sales and collection cycle
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Phase III
Design and perform analytical
procedures for accounts
receivable balance
Design tests of
details of accounts
receivable balance
to satisfy balance-
related audit objectives
Audit procedures
Sample size
Items to select
Timing
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Aged Trial Balance
Recorded Accounts Receivable Exist
Existing Accounts Receivable Are Included
Accounts Receivable Are Accurate
Accounts Receivable Are Properly Classified
Cutoff for Accounts Receivable Is Correct
Accounts Receivable Is Stated at Realizable Value
Accounts Receivable Presentation and Disclosures Are Proper
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Confirmation of Accounts Receivable
AICPA Requirements
1,Accounts receivable are immaterial.
2,The auditor considers confirmations ineffective evidence
because response rates will likely be inadequate or
unreliable.
3,The combined level of inherent risk and control risk is
low and other substantive evidence can be accumulated
to provide sufficient evidence.
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
FIGURE 15 - 1
METHODOLOGY FOR
DESIGNING TESTs OF
DETAILS OF BALANCE
FOR ACCOUNTS
RECEIVABLE
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
FIGURE 15 -2
Relationship between
Transaction-Related
Audit Objectives for the
Sales and Collection Cycle
and Balance-
Related Audit Objectives
for Accounts receivable
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Confirmation Decisions
Types of Confirmation
Positive confirmation
Blank confirmation form
Invoice confirmation
Negative confirmation
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
TIMING
The most reliable evidence
from confirmations is obtained
when they are sent as close to the
balance sheet date as possible,as opposed
to confirming the accounts several months
before yearend.
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Sample Size
Fall into several categories and include the following:
Tolerable misstatement
Inherent risk (relative size of total accounts
receivable,number of accounts,prior year
results,and expected misstatements)
Control risk
Achieved detection risk from other substantive
test (extent and results of substantive tests of
transactions,analytical procedures,and
other tests of details)
Type of confirmation (negatives normally require a
larger sample size)
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Selection of the Items for Testing
When selecting a sample of accounts receivable for
confirmation,the auditor should be careful to avoid
being influenced by the client,If a client tries to
discourage the auditor from sending confirmation to
certain customers,the auditor should consider the
possibility that the client is attempting to conceal
fictitious or known misstatements
of accounts receivable.
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Subsequent Cash Receipts
Evidence of the receipt of cash subsequent to the
confirmation date includes examining remittance
advices,entries in the cash receipts records,or
perhaps even subsequent credits in the accounts
receivable master files.
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Duplicate Sales Invoices
These are useful in verifying
the actual issuance of a sales
invoice and the actual date of
the billing.
Shipping Documents
These are important in establishing
whether the shipment was actually
made and as a test of cutoff.
Correspondence with the Client
Usually,the auditor does not need to review correspondence
as a part of alternative procedures,but correspondence can
be used to disclose disputed and questionable receivables
not uncovered by other means,
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Payment Has Already Been Made
Goods Have Not Been Received
The Goods Have Been Returned
Clerical Errors and Disputed Accounts
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Accounts receivable
balance-related audit objectives
Aged trial balance
Alternative procedures
Blank confirmation form
Cutoff misstatement
Invoice confirmation
Negative confirmation
Positive confirmation
Realizable value of accounts receivable
Timing difference
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
FIGURE 15 - 3
Aged Trial Balance for
Hillsburg Hardware Co.
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Analytical
Procedures
for the Sales and
Collection Cycle
FIGURE 15 - 1
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
FIGURE 15 -4
Analysis
of Allowance
for Uncollectible
Accounts for
Hillsburg Hardware Co.
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
FIGURE 15 -7
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
FIGURE 15 -5