Chapter 16

Completing the
Tests in the Sales
and Collection
Cycle:
Accounts Receivable
Copyright 2014 Pearson Education

Describe the methodology for designing

tests of details of balances using the audit
risk model.
Design and perform analytical procedures
for accounts in the sales and collection
cycle.
Design and perform tests of details of
balances for accounts receivable.
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Obtain and evaluate accounts receivable

confirmations.
Design audit procedures for the audit of
accounts receivable, using the evidence
planning worksheet as a guide.

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

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Detail tie-in
Rights

Existence

Completeness

A/R
Audit
Objectives

Realizable value

Cutoff

Accuracy

Classification

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Phase I

Identify client
business
risks
affecting
Accounts
Receivable

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Set
performance
materiality
and assess
inherent risk
for accounts
receivable

Assess
control risk
for sales
and
collection
cycle

Copyright 2014 Pearson Education

Phase II

Design and perform tests of controls and

substantive tests of transactions
for the sales and collection cycle

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Phase III

Design and perform

analytical procedures
for accounts receivable

Audit
procedures
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Sample
size

Design tests of details

of accounts receivable
balance to satisfy
balance-related
objectives

Items to
select

Timing

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Rights

Realizable
value

Cutoff

Classification

Accuracy

Completeness

Sales

Existence

Translation-related
audit objectives

Detail tie-in

ACCOUNTS RECEIVABLE
BALANCE-RELATED
AUDIT OBJECTIVES

Occurrence
Completeness
Accuracy
Posting and
summarization
Classification
Timing
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Rights

Realizable
value

Cutoff

Classification

Accuracy

Completeness

Cash receipts

Existence

Translation-related
audit objectives

Detail tie-in

ACCOUNTS RECEIVABLE
BALANCE-RELATED
AUDIT OBJECTIVES

Occurrence
Completeness
Accuracy
Posting and
summarization
Classification
Timing
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2
Design and perform analytical procedures for
accounts in the sales and collection cycle.

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Compare by product line:

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Gross margin percentage with

previous years

Sales by month over time

Sales returns and allowances

as a percentage of gross sales
with previous years

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Compare with previous years:

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Individual customer balances over

a stated amount

Bad debt expense as a percentage

of gross sales

Days that accounts receivable

are outstanding

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Compare with previous years:

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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

Copyright 2014 Pearson Education

Percent
Percent
change
12/31/13 change 12/31/12 2011- 12/31/11
($000) 2012-13 ($000)
2012 ($000)
Sales
144,328
Gross margin
39,845
Accounts receivable
20,197
Bad debt expense
3,323
Total current assets
51,027
Total assets
61,367
Net earnings
5,681
Number of accounts
receivable
258
Number of accts. rec. with
balances over $100,000
37
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9.0
9.6
7.3
(2.1)
14.0
(7.0)
21.9

132,421
36,350
18,827
3,394
44,779
66,021
4,659

7.0
7.0
14.1
7.3
6.6
8.0
39.0

123,737
33,961
16,505
3,162
41,989
61,147
3,351

16.7

221

5.7

209

15.6

32

6.7

30

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16-16

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 Planned detection risk for each

objective is an auditor decision

Combining the factors that determine

planned detection risk is complex

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3
Design and perform tests of details of balances
for accounts receivable.

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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

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Accounts receivable are accurate

Accounts receivable are properly classified

Cutoff for accounts receivable is correct

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 Accounts receivable is stated at

realizable value
The client has rights to accounts receivable

Accounts receivable presentation and

disclosure

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4
Obtain and evaluate accounts receivable
confirmations.

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Auditing Standards
United States

International

Required Except
when:

Confirmations not
required

Expected low
response rate
Low inherent &
control risks
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Alternate
Procedures

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 Positive confirmation
Blank confirmation form
Invoice confirmation

Negative confirmation

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 Risk of material misstatement is low

Large number of small account balances

Expected low exception rate
Expect adequate consideration from
recipients

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The most reliable evidence from confirmations

is obtained when they are sent as close to the
balance sheet date as possible.

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Performance
materiality
Inherent Risk

Control Risk

Sample
Size factors

Type of
Confirmation

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Achieved
Detection
risk from
other tests

Copyright 2014 Pearson Education

The auditor should perform procedures to

verify the addresses or email addresses
used for confirmation.

Auditors must be responsible for mailing

the confirmations and maintaining control
of the confirmations until they are returned
from the customer.
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When positive confirmations are used,

Auditing standards require follow-up
Procedures for confirmations not
returned by the customer.
Alternate Procedures

Subsequent
cash receipts
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Duplicate
sales
invoices

Shipping
documents
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 Payment-in-transit
Shipment-in-transit
The goods have been returned

Errors and disputes

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Reevaluate internal control

Evaluate the qualitative nature of
misstatements
Determine whether sufficient evidence
was obtained

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5
Design audit procedures for the audit of
accounts receivable, using an evidence
planning worksheet as a guide.

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Copyright

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
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