Auditing and assurance services 14e by arens chapter 16

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5 - 5Completing the Tests in the Sales and Collection Cycle: Accounts Receivable Chapter 16 http://www.authors

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5 - 5

Completing the Tests

in the Sales and Collection Cycle:

Accounts Receivable

Chapter 16

http://www.authorstream.com/shengv

n/

Learning Objective 1

Describe the methodology for designing

tests of details of balances using the audit risk model.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 3

Accounts Receivable

Balance-related Audit Objectives

Realizable value Completeness

Methodology for Designing Tests

of Details of Balances for A/R

Phase I

Set tolerable misstatement and assess inherent risk for accounts receivable

Identify client

business risks

affecting Accounts Receivable

Assess control risk for sales and collection cycle

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 5

Methodology for Designing Tests

of Details of Balances for A/R

Phase II

Design and perform tests of controls and

substantive tests of transactions for the sales and collection cycle

Methodology for Designing Tests

of Details of Balances for A/R

Phase III

Sample size

Design and perform

analytical procedures for

accounts receivable

Design tests of details

of accounts receivable balance to satisfy balance-related objectives

Audit procedures

Items to select

Timing

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 7

Relationship Between Sales and

Sales Occurrence

Relationship Between Sales and

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 9

Learning Objective 2

Design and perform analytical procedures

for accounts in the sales and collection

cycle.

Analytical Procedures for the Sales and Collection Cycle

previous years

as a percentage of gross sales with previous years

Compare by product line:

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 11

Analytical Procedures for the Sales and Collection Cycle

Analytical Procedures for the Sales and Collection Cycle

of receivables

a percentage of accounts receivable

percentage of total accounts receivable Compare with previous years:

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 13

Bad debt expense

Total current assets

9.0 9.6 7.3 (2.1) 14.0 (7.0) 21.9 16.7 15.6

132,421 36,350 18,827 3,394 44,779 66,021 4,659 221 32

7.0 7.0 14.1 7.3 6.6 8.0 39.0 5.7 6.7

123,737 33,961 16,505 3,162 41,989 61,147 3,351 209 30

12/31/11 ($000)

Percent change 2010-11 12/31/10 ($000)

Percent change 2009-

2010 12/31/09 ($000)

Analytical Procedures: Sales and

Collection Cycle

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 15

Design and Perform Tests of Details

of A/R Balance (Phase III)

objective is an auditor decision

planned detection risk is complex

Learning Objective 3

Design and perform tests of details of

balances for accounts receivable

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 17

Designing Tests of Detail

of Balances

Accounts receivable are correctly added and agree with the Master File and the General

Designing Tests of Detail

of Balances

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 19

Designing Tests of Detail

of Balances

realizable value

disclosure

Learning Objective 4

Obtain and evaluate accounts receivable

confirmations.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 21

Procedures

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Positive Confirmation

Negative Confirmation

Requirements

recipients

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Negative Confirmation

The most reliable evidence from confirmations

is obtained when they are sent as close to the

balance sheet date as possible

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 27

Sampling Decisions

Achieved Detection risk from other tests

Tolerable misstatement Inherent Risk

Type of Confirmation

Sample Size factors

Control Risk

Verifying Addresses and

Maintaining Control

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.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 29

Follow-up on Nonresponses

When positive confirmations are used,

AU 330 requires follow-up procedures for confirmations not returned by

the customer.

Alternate Procedures

Duplicate sales invoices

Subsequent

cash receipts

Shipping documents

Analysis of Differences

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 31

Drawing Conclusions

misstatements

was obtained

Learning Objective 5

Design audit procedures for the audit of

accounts receivable, using an evidence

planning worksheet as a guide.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 16 - 33

Evidence Planning Worksheet

End of Chapter 16