4 Methodology for Designing Tests of Details of Balances for A/R Phase IIdentify client business risks affecting accountsreceivable.Set tolerable misstatement and assess inherentrisk for accounts receivable.Assess control risk for sales and collection cycle.
5 Methodology for Designing Tests of Details of Balances for A/R Phase IIDesign and perform tests of controls andsubstantive tests of transactions for thesales and collection cycle.
6 Methodology for Designing Tests of Details of Balances for A/R Phase IIIDesign and perform analytical procedures foraccounts receivable balance.Design tests of details of accounts receivablebalance to satisfy balance-related audit objectives.TimingItems toselectSamplesizeAuditprocedures
7 Relationship Between Sales and Accounts Receivable and disclosurePresentationDetail tie-inExistenceCompletenessAccuracyClassificationCutoffRealizablevalueRightsAccounts receivable balance-related audit objectivesTranslation-relatedaudit objectivesSalesTimingPosting/Summary×
8 Relationship Between Sales and Accounts Receivable and disclosurePresentationDetail tie-inExistenceCompletenessAccuracyClassificationCutoffRealizablevalueRightsAccounts receivable balance-related audit objectivesTranslation-relatedaudit objectivesCash receiptsTimingPosting/Summary×
9 Learning Objective 2 Design and perform analytical procedures for accounts in thesales and collection cycle.
10 Analytical Procedures for the Sales and Collection Cycle Compare by product line:Gross margin percentage with previous yearsSales by month over timeSales returns and allowances as a percentage ofgross sales with previous years
11 Analytical Procedures for the Sales and Collection Cycle Compare with previous years:Individual customer balances over a stated amountBad debt expense as a percentage of gross salesDays that accounts receivable are outstanding
12 Analytical Procedures for the Sales and Collection Cycle Compare with previous years:Aging category as a percentage of receivablesAllowance for uncollectible accounts as apercentage of accounts receivableCharge-off of uncollectible accounts as apercentage of total accounts receivable
13 Selected Comparative Information SalesGross marginAccounts receivableBad debt expenseTotal current assetsTotal assetsNet earningsNumber of accountsreceivableNumber of accts. rec. withbalances over $100,000144,32839,84520,1973,32351,02761,3675,681258379.09.67.3(2.1)14.0(7.0)21.916.715.6132,42136,35018,8273,39444,77966,0214,659221327.014.16.68.039.05.76.7123,73733,96116,5053,16241,98961,1473,3512093012/31/04($000)Percentchange2003-200412/31/032002-200312/31/02
14 Analytical Procedures: Sales and Collection Cycle Gross margin/net salesSales returns and allowances/gross salesBad debt expense/net salesAllowance for uncollectibleaccounts/accounts receivableNumber of days receivablesoutstandingNet accounts receivable/current assets27.85%0.90%2.30%6.10%48.0937.20%27.70%2.60%7.50%47.9632.50%27.68%6.40%49.3232.30%12/31/0412/31/0312/31/02
15 Design and Perform Tests of Details of A/R Balance (Phase III) Planned detection risk for each objectiveis an auditor decision.Combining the factors that determineplanned detection risk is complex.
16 Analytical Procedures for Gross Margin HardwoodSoftwoodPlywood36.323.940.320052004200332.422.050.136.420.344.232.522.154.336.020.545.432.322.355.6Gross margin percentGreatWesternIndustry
17 Learning Objective 3 Design and perform tests of details of balances for accountsreceivable for each balance-related audit objective.
18 Designing Tests of Detail of Balances Accounts receivable are correctly added andagree with the Master File and the GeneralLedger (aged trial balance).Recorded accounts receivable existExisting accounts receivable are included
19 Designing Tests of Detail of Balances Accounts receivable are accurateAccounts receivable are properly classifiedCutoff for accounts receivable is correct
20 Designing Tests of Detail of Balances Accounts receivable is stated at realizable valueThe client has rights to accounts receivableAccounts receivable presentation anddisclosures are proper
21 Learning Objective 4 Obtain and evaluate accounts receivable confirmations.
22 AICPA Requirements 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.
23 Type of Confirmation Positive confirmation Blank confirmation form Invoice confirmationNegative confirmation
24 Timing The most reliable evidence from confirmations is obtained when they are sent as close to thebalance sheet date as possible, as opposedto confirming the accounts several monthsbefore year-end.
25 Sample Size Tolerable misstatement Inherent risk Control risk Achieved detection risk fromother substantive testsType of confirmation
26 Selection of the Items for Testing When selecting a sample of accounts receivablefor confirmation, the auditor should be carefulto avoid being influenced by the client.
27 Selection of Items for Testing If a client tries to discourage the auditor fromsending confirmations to certain customers,the auditor should consider the possibilitythat the client is attempting to concealfictitious or known misstatementsof accounts receivable.
28 Maintaining Control After the items for confirmation have been selected, the auditor must maintain controlof the confirmations until they are returnedfrom the customer.
29 Follow-up on Nonresponses When positive confirmations are used,SAS 67 requires follow-up proceduresfor confirmations not returned byhe customer.Alternative procedures
30 Subsequent 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.
31 Duplicate Sales Invoices These are useful in verifying the actualissuance of a sales invoice and theactual date of the billing.
32 Shipping Documents These are important in establishing whether the shipment was actuallymade and as a test of cutoff.
33 Correspondence With the Client Usually, the auditor does not need to reviewcorrespondence as a part of alternativeprocedures, but correspondence canbe used to disclose disputed andquestionable receivables notuncovered by other means.
34 Analysis of Difference Payment has already been madeGoods have not been receivedThe goods have been returnedClerical errors and disputed accounts