1. Substantive Year End Testing in Sales and Collection Cycle
Donald K. McConnell Jr.
7/5/2019

2. Accounts Receivable Confirmation Issues
External evidence
Best suited for identifying overstated or invalid account balances
Exhibit an “overstatement bias”
First Auditing Standard (1939: SAP I) made A/R confirmation a requirement, along with inventory observation
AU 330 issues:
Presumption: still must confirm AR
However, presumption overcome if one or more AU conditions exist
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3. Implementing A/R Confirmation Theory in Practice
Confirm as soon as possible after year end ordinarily
Verify A/R master files tie to G/L control
Confirm all A/R exceeding TM 100%
Sample confirm from remaining A/R in master files
Auditor must control mailing confirmation
Return envelope should be provided
Investigating confirmation exceptions:
Who does actual investigative work?
Auditor must be satisfied with documentation that exceptions are actually timing differences
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4. Clearing up Confirmation Timing Differences: Common Practice Examples
“We paid this.”
“We paid this on January 4.”
“We don’t owe this, as we had not received shipment.”
“Due to nature of our system, we are unable to confirm this balance.”
“Due to nature of our system, we are unable to confirm this balance; however, we are willing to verify a few open items.”
Reconcilable timing differences are not misstatements for purposes of projecting likely error
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5. Alternative Procedures
Required for non responding positives unless Au conditions met
First examine for subsequent cash collection
Be sure collections apply to receivables in question!
If no collections, examine documentation:
Customer P.O.s
Shipping documentation
Sales invoices
Contracts
May do both, if concerns about cut-offs
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6. Alternative Procedures Issues
How could performance of alternative procedures identify misstatements?
What is the issue?
Receipt of an A/R confirmation provides external information about possible misstatements
Alternative procedures are performed on documents provided by client!
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7. Examples of Misstatements Potentially Identifiable in Performing Alternative Procedures
No purchase orders exist! What might this suggest?
Shipping document date is in early January. What might this suggest?
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8. Alternative Procedures May Be Omitted for Nonresponding Positive Confirmations if:
Auditor has not identified unusual qualitative factors or systematic characteristics relating to the nonresponding A/R. [There is no identifiable nonresponse bias.]
When the aggregate nonresponses, projected as being 100 percent misstated, added to the sum of other unadjusted audit differences, would not materially affect the financial statements [Summed, they aren’t material.]
Both of these conditions must be met! (Au )
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9. Examples of Au 330.31 Theory Assume TM = $100,000
Non responding positives, no ID’d bias = $50,000
Other Audit AJE’s passed, dr. effect = $10,000
Conclusion?
No need to apply alternative procedures
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10. Examples of Au 330.31 Theory (con.)
Assume TM = $100,000
Non responding positives, no ID’d bias = $50,000
Other Audit AJE’s passed, dr. effect = $70,000
Conclusion?
Must do alternative procedures
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11. Examples of Au 330.31 Theory (con.)
Assume TM = $100,000
Non responding positives=$50,000
All are new customers
Other Audit AJE’s passed, dr. effect = $10,000
Conclusion?
Must apply alternative procedures
Why?
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12. U.S. Government and Some Companies Will Not Respond to Confirmation Requests
A classic example of confirmations being ineffective (Au )
What would auditor do?
A/R assertions must be directly verified by other audit procedures:
Performing alternative procedures
Analytical review
Where impracticable to confirm, if alternatively satisfied, no reference to alternative procedures in audit report
7/5/2019