Auditing Completing The Test in Sales and Collection Cycle

Auditing and Assurance Services
Seventeenth Edition, Global Edition
Chapter 15
Completing the Tests in the
Sales and Collection Cycle:
Accounts Receivable
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Learning Objectives
15.1 Describe the methodology for designing tests of details
of balances using the audit risk model
15.2 Design and perform substantive analytical
procedures for accounts in the sales and collection
cycle
15.3 Design and perform tests of details of balances for
accounts receivable
15.4 Obtain and evaluate accounts receivable
confirmations
15.5 Design audit procedures for the audit of accounts
receivable, using an evidence-planning worksheet as a
guide

Methodology for Designing Tests of
Details of Balances (1 of 3)
• In designing tests of details of balances for accounts
receivable, auditors must satisfy each of the nine
balance-related audit objectives:
– (1) Detail tie-in (2) Existence
– (3) Completeness (4) Accuracy
– (5) Cutoff (6) Realizable value
– (7) Classification (8) Rights
– (9) Presentation

Figure 15.1 Methodology for
Designing Tests of Details of
Balances for Accounts Receivable

• Tests of accounts receivable are based on the auditor’s
risk assessment procedures
• Auditor performs preliminary analytical procedures that
may indicate increased risk of misstatements in accounts
receivable
• As part of the assessment of the risk of material
misstatement, the auditor determines whether any of the
risks identified are a significant risk

• Internal controls over sales and cash receipts and the
related accounts receivable are at least reasonably
effective for most companies
• Auditors are especially concerned with three aspects
of internal controls:
– Controls that prevent or detect embezzlements
– Controls over cutoff
– Controls related to the allowance for uncollectible
accounts

Figure 15.2 Relationship Between Transaction-Related Audit
Objectives for the Sales and Collection Cycle and Balance-
Related Audit Objectives for Accounts Receivable

Design and Perform Substantive
Analytical Procedures (1 of 3)
• Most substantive analytical procedures performed during
the detailed testing phase are done before tests of details
of balances since the results of the substantive
analytical procedure affect the extent of detail testing
• Auditors perform both planning and substantive analytical
procedures for the entire sales and collection cycle,
not just accounts receivable

• In addition to the analytical procedures, auditors
should review accounts receivable for:
– Large and unusual amounts, such as large balances
– Accounts that have been outstanding for a long time
– Receivables from affiliated companies, officers,
directors, and other related parties
– Credit balances

• If the results are favorable
–They reduce the extent to which the auditor needs
to perform detailed tests of balances
• If the results uncover unusual fluctuations
–The auditor should make additional inquiries of
management

Table 15.1 Analytical Procedures for
the Sales and Collection Cycle (1 of 2)
Analytical Procedure Possible Misstatement
Compare gross margin percentage with
previous years (by product line).
Overstatement or understatement of
sales and accounts receivable.
Compare sales by month (by product line) over
time.
sales and accounts receivable.
Compare sales returns and allowances as a
percentage of gross sales with previous
years (by product line).
sales returns and allowances and
accounts receivable.
Compare individual customer balances over a
stated amount with previous years.
Misstatements in accounts receivable
and related income statement
accounts.
Compare bad debt expense as a percentage of
gross sales with previous years.
Uncollectible accounts receivable that
have not been provided for.

Table 15.1 Analytical Procedures for
the Sales and Collection Cycle (2 of 2)
Analytical Procedure Possible Misstatement
Compare number of days that accounts
receivable are outstanding with previous
years and related turnover of accounts
receivable.
allowance for uncollectible accounts
and bad debt expense; also may
indicate fictitious accounts
receivable.
Compare aging categories as a percentage of
accounts receivable with previous years.
and bad debt expense.
Compare allowance for uncollectible accounts
as a percentage of accounts receivable with
previous years.
Compare write-off of uncollectible accounts as
a percentage of total accounts receivable
with previous years.

Analytical Procedures for the Sales
and Collection Cycle

Balances (1 of 4)
• Even though auditors emphasize balance sheet accounts
in tests of details of balances
– They are not ignoring income statement accounts
because the income statement accounts are tested as
a by-product of the balance sheet tests
• The audit procedures selected and their sample size will
depend heavily on whether planned evidence for a given
objective is low, medium, or high

Balances (2 of 4)
• Most tests of accounts receivable and the allowance for
uncollectible accounts are based on the aged trial
balance
• An aged trial balance lists:
– The balances in the accounts receivable master file at
the balance sheet date
– The breakdown of each balance by the time passed
between the date of sale and the balance sheet date

Figure 15.3 Aged Trial Balance for
Starkwood Group

Allowance for Uncollectible AR

Balances (3 of 4)
• The auditor’s tests of details of balances for accounts
receivable include (1 of 2):
– Recorded accounts receivable exist (existence)
– Existing accounts receivable are included
(completeness)
– Accounts receivable are accurate (accuracy)
– Cutoff for accounts receivable is correct

Balances (4 of 4)
• The auditor’s tests of details of balances for accounts
receivable include (2 of 2):
– Accounts receivable is stated at realizable value
(NRV)
– Accounts receivable are properly classified
(Clasification)
– The client has rights to accounts receivable (Rights
and Obligation)
– Accounts receivable presentation and disclosure

Confirmation of Accounts Receivable
(1 of 4)
• Confirmation of accounts receivable is the most
important test of details of accounts receivable
• The primary purpose of accounts receivable confirmation
is to satisfy the existence, accuracy, and cutoff
objectives
• The confirmation can be a direct written response from
a third party in paper or electronic form

(2 of 4)
• Auditors should use external confirmations for
accounts receivable unless:
– The overall accounts receivable balance is immaterial
– The auditor considers confirmations ineffective
evidence because response rates will likely be
inadequate or unreliable
– The auditor’s assessed level of the risk of material
misstatement is low and other substantive evidence
can be accumulated to provide sufficient evidence

(3 of 4)
• Types of confirmation include positive and negative
confirmation
• The most reliable evidence from confirmations is obtained
when they are sent close to the balance sheet date
• Sample size for confirming accounts receivable is based
on performance materiality, inherent risk, control risk,
detection risk, and types of confirmation

(4 of 4)
• Nonresponses to positive confirmations do not provide
audit evidence, though nonresponses to negative
confirmations provide some evidence of the existence
assertion
• It is necessary to follow up on nonresponses with
alternative procedures –
• Subsequent Receipt and Inspection
– The objective is to determine by a means other than
confirmation whether the nonconfirmed account
existed and was properly stated at the confirmation
date

Positive Confirmation

Negative Confirmation

Developing Tests of Details Audit
Program
• The evidence-planning worksheet is an aid for the
auditor to decide the extent of planned tests of details
of balances
• The determination of the development of audit program
procedures is based on the tests of controls and
substantive tests of transactions

Evidence-planning Worksheet

Program Audit - Partial

Copyright
This work is protected by United States copyright laws and is
provided solely for the use of instructors in teaching their
courses and assessing student learning. Dissemination or sale of
any part of this work (including on the World Wide Web) will
destroy the integrity of the work and is not permitted. The work
and materials from it should never be made available to students
except by instructors using the accompanying text in their
classes. All recipients of this work are expected to abide by these
restrictions and to honor the intended pedagogical purposes and
the needs of other instructors who rely on these materials.

Auditing Completing The Test in Sales and Collection Cycle

More Related Content

Similar to Auditing Completing The Test in Sales and Collection Cycle (20)

More from RikiWahyudi19 (8)

Recently uploaded (20)

Auditing Completing The Test in Sales and Collection Cycle

Editor's Notes