7.5 When documents such as sales orders, shipping documents, and sales invoices are prenumbered, someone can later account for the numerical sequence and determine whether any transactio
Trang 1CHAPTER 7
Revenue and Collection Cycle
LEARNING OBJECTIVES
ReviewCheckpoints
Exercises,Problems, andSimulations
1 Discuss inherent risks related to the revenue
and collection cycle with a focus on improper
revenue recognition
2 Describe the revenue and collection cycle,
including typical source documents and
controls
4, 5, 6, 7, 8 54, 55, 61, 63, 64,
66
3 Give examples of tests of controls over
customer credit approval, delivery, and
accounts receivable accounting
9, 10, 11, 12, 13, 14 56, 65
4 Give examples of substantive procedures in
the revenue and collection cycle and relate
them to assertions about account balances at
the end of the period
15, 16, 17, 18, 19,
20, 21, 22 57, 58, 60, 61, 67, 68, 69, 70
5 Describe some common errors and frauds in the
revenue and collection cycle, and design some
audit and investigation procedures for detecting
them
23, 24, 25 26, 27,
SOLUTIONS FOR REVIEW CHECKPOINTS
7.1 Revenue recognition refers to including revenue in the financial statements According to GAAP, this is
done when revenues are (1) realized or realizable and (2) earned
7.2 Revenue recognition is used as a primary means for inflating profits for several reasons First, it is not
always straightforward when revenues have been earned Sales can be structured with return provisions, or can have other performance provisions attached Second, the timing of shipments at year end may be easy
to falsify Third, companies are often valued at multiples of revenue instead of net income
7.3 “Bill and Hold” sales are recognized when sales are billed, thus creating a receivable, but the goods are
held by the seller until the customer actually wants them
Trang 27.4 The basic sequence of activities and accounting in a revenue and collection cycle is:
1 Receiving and processing customer orders Entering data in an order system and obtaining a credit
check
2 Delivering goods and services to customers Authorizing release from storekeeping to shipping to
customer Entering shipping information in the accounting system
3 Billing customers, producing sales invoices Accounting for customer trade accounts receivable
4 Collecting cash and depositing it in the bank Accounting for cash receipts
5 Reconciling bank statements
7.5 When documents such as sales orders, shipping documents, and sales invoices are prenumbered, someone
can later account for the numerical sequence and determine whether any transactions have failed to be recorded (Completeness assertion.)
7.6 Access to computer terminals should be controlled so only authorized persons can enter or change
transaction data Access to master files is important because changes in them affect automatic computer controls, such as credit checking and accurate inventory pricing
7.7 Auditors could examine these files for evidence of:
• Unrecorded sales — pending order master file,
• Inadequate credit checks — credit data/check files
• Incorrect product unit prices — price list master file
7.8 With a sample of customer accounts receivable:
1 Find the support for debit entries in the sales journal file Expect to find evidence (copy) of a sales
invoice, shipping document, and customer order The sales invoice showing recording on the shipping date
2 Find the support for credit entries in the cash receipts journal file Expect to find a remittance
advice (entry on list), which corresponds to detail on a deposit slip, on a deposit actually in a bank statement for the day posted in the customers’ accounts
7.9 The account balances in a revenue and collection cycle include:
• Accounts receivable
• Allowance for doubtful accounts
• Bad debt expense
• Sales revenue
• Sales returns, allowances, discounts
7.10 These specific control procedures (in addition to separation of duties and responsibilities) should be in
place and operating in a control system governing revenue recognition and cash accounting:
1 No sales order should be entered without a customer order
2 A credit-check code or manual signature should be recorded by an authorized means
3 Access to inventory and the shipping area should be restricted to authorized persons
Trang 35 Accountants should be instructed to record sales and accounts receivable when all the supporting
documentation of shipment is in order, and care should be taken to record sales and receivables as
of the date goods and services were shipped, and cash receipts on the date the payments are received
6 Customer invoices should be compared with bills of lading and customer orders to determine that
the customer is sent the goods ordered at the proper location for the proper prices and that the quantity being billed is the same as the quantity shipped
7 Pending order files should be reviewed timely to avoid failure to bill and record shipments
8 Bank statements should be reconciled in detail monthly
7.11 In a “walk through” of a sales transaction, auditors take a single example of a sales transaction and trace it
from the initial customer order through credit approval, billing, and delivery of goods, to the entry in the sales journal and subsidiary accounts receivable records, then its subsequent collection and cash deposit Sample documents are collected and employees in each department are questioned about their specific duties The information gained from documents and employees can be compared to answers obtained on aninternal control questionnaire The purpose of the “walk through” is to obtain an understanding of the transaction flow, the control procedures, and the populations of documents that may be utilized in tests of controls
7.12 The assertions made about classes of transactions and events in the revenue and collection cycle are:
1 Sales and related events that have been recorded have occurred and pertain to the entity
2 All sales and related events that should have been recorded have been recorded
3 Amounts and other data related to sales transactions and events have been recorded properly
4 Sales and related events have been recorded in the correct period
5 Sales and related events have been recorded in the proper accounts
7.13 In general, the actions in tests of controls involve vouching, tracing, observing, scanning, and recalculating.
7.14 Dual direction tests of controls refers to procedures that test file contents in two “directions” — the
occurrence direction and the completeness direction The occurrence direction is a sample from the accountbalance (e.g sales revenue) vouched to supporting sales and shipping documents for evidence of
occurrence The completeness direction is a sample from the population that represents all sales (e.g shipping document files) traced to the sales journal or sales account for evidence that no transactions (shipments, sales) were omitted
7.15 It is important to place emphasis on the existence assertion because auditors have often gotten into
malpractice trouble by giving unqualified reports on financial statements that overstated assets and revenues and understated expenses For example, credit sales recorded too early (fictitious sales?) result in overstated accounts receivable and overstated sales revenue
7.16 These procedures are usually the most useful for auditing the existence assertion:
Confirmation Letters of confirmation can be sent customers, asking for a report of the balances owed the company
Verbal Inquiry Inquiries to management usually do not provide very convincing evidence about existence and ownership However, inquiries should always be made about the company’s agreements to pledge or sell with recourse accounts receivable in connection with financings
Trang 4Examination of Documents (Vouching) Evidence of existence can be obtained examining shipping documents Examination of loan documents may yield evidence of the need to disclose receivables pledged
as loan collateral
Scanning Assets are supposed to have debit balances A computer can be used to scan large files of accounts receivable, inventory, and fixed assets for uncharacteristic credit balances The names of debtors can be scanned for officers, directors, and related parties, amounts for which need to be reported separately
or disclosed in the financial statements
Analytical Procedures Comparisons of asset and revenue balances with recent history might help detect overstatements Relationships such as receivables turnover, gross margin ratio and sales/asset ratios can be compared to historical data and industry statistics for evidence of overall reasonableness Account
interrelationships also can be used in analytical review For example, sales returns and allowances and salescommissions generally vary directly with dollar sales volume, bad debt expense usually varies directly withcredit sales volume, and freight expense varies with the physical sales volume Accounts receivable write-offs should be compared with earlier estimate of doubtful accounts
7.17 Comparison of sales and accounts receivable to previous periods provides information about existence
Other useful analytical procedures include receivables turnover and days of sales in receivables, aging, gross margin ratio, and sales/asset ratios, which can be compared to historical data and industry statistics for evidence of overall reasonableness Auditors may also compare sales to non-financial data such as units sold, number of customers, sales commissions, etc These comparisons can be made by product, period, geographic region, or salesperson
7.18 A “positive” confirmation is a request for a response from an independent party whom the auditor has
reason to expect is able to reply A “negative” confirmation is a request for a response from the independent
party only if the information is disputed Negative confirmations should also be sent only if the recipient
can be expected to detect an error and reply accordingly They are normally used for accounts with small balances when control risk is low
7.19 Justifications for the decision not to use confirmations for trade accounts receivable in a particular audit
include: (1) receivables are not material, (2) confirmations would be ineffective, based on prior years’ experience or knowledge that responses could be unreliable, and (3) analytical procedures and other substantive procedures provide sufficient, competent evidence
7.20 Special care in examining sources of accounts receivable confirmation responses:
Auditors need to control the confirmations, including the addresses to which they are sent Experience is full of cases where confirmations were mailed to company accomplices, who provided false responses Theauditors should carefully consider features of the reply such as postmarks, FAX and telegraph responses, letterhead, electronic mail, telephone, or other characteristics that may give clues to indicate false
responses Auditors should follow up electronic and telephone responses to determine their origin (for example, returning the telephone call to a known number, looking up telephone numbers to determine addresses, or using a criss-cross directory to determine the location of a respondent)
7.21 When positive confirmations are not returned the auditor should perform the following procedures:
1 Send second and even third requests
2 Apply subsequent cash receipts
3 Examine sales orders, invoices and shipping documents, and
4 Examine correspondence files for past due accounts
Trang 57.22 To determine the adequacy of the allowance for doubtful accounts, the auditor reviews subsequent cash
receipts from the customer, discusses unpaid accounts with the credit manager and examines the credit files These should contain customer’s financial statements, credit reports and correspondence between the client and the customer Based on this evidence, the auditor estimates the likely amount of non-payment forthe customer, which is included in the estimate of the allowance for doubtful accounts In addition, an allowance should be estimated for all other customers, perhaps as a percentage of the current accounts and
a higher percentage of past due accounts The auditor compares his/her estimate to the balance in the allowance account and proposes an adjusting entry for the difference
7.23 Dual-direction testing involves selecting samples to obtain evidence about control over completeness in one
direction and control over occurrence in the other direction The completeness direction determines
whether all transactions that occurred were recorded (none omitted), and the occurrence direction
determines whether recorded transactions actually occurred (were valid) An example of the completeness direction is the examination of a sample of shipping documents (from the file of all shipping documents) to determine whether invoices were prepared and recorded An example of the occurrence direction is the examination of a sample of sales invoices (from the file representing all recorded sales) to determine whether supporting shipping documents exist to verify the fact of an actual shipment The content of each file is compared with the other
7.24 In the “Canny Cashier”, if someone other that the assistant controller had reconciled the bank statement and
compared the details of bank deposit slips to cash remittance reports, the discrepancies could have been noted and followed up The discrepancies were that customers and amounts on the two did not match.7.25 To prevent the cash receipts journal and recorded cash sales from reflecting more than the amount shown
on the daily deposit slip, the internal control system should provide that receipts be recorded daily and intact A careful bank reconciliation by an independent person could detect such errors
7.26 Confirmations to taxpayers who had actually paid their taxes would have produced exceptions, complaints,
and people with their counter receipts These results would have revealed the embezzlement
7.27 Auditors might have obtained the following information:
Inquiries: Personnel admitting the practices of backdating shipping documents in a “bill and hold” tactic, orpersonnel describing the 60-day wait for a special journal entry to record customer discounts taken
Tests of controls: The sample of customer payment cash receipts would have shown no discount
calculations and authorizations, leading to inquiries about the manner and timing of recording the
discounts
Observation: When observing the physical inventory-taking, special notice should be taken of any goods onthe premises but excluded from the inventory These are often signs of sales recorded too early
Confirmations of accounts receivable: Customers who had not yet been given credit for their discounts can
be expected to take exception to a balance too large
7.28 The auditors would have known about the normal Friday closing of the books for weekly management
reports, and they could have been alerted to the possibility that the accounting employees overlooked the once-a-year occurrence of the year end date during the week
Trang 6SOLUTIONS FOR MULTIPLE CHOICE QUESTIONS
7.29 a Incorrect Allowances can be made for anticipated returns if the earning process is
substantially complete
b Correct The earning process is complete at this point
c Incorrect Under accrual accounting, the cash does not have to be collected, only
collectible
d Incorrect This is usually the method for determining “b” but the shipment might be FOB
destination7.30 a incorrect This only initiates the earnings process, it doesn’t complete it
b incorrect This is often the case, but it depends on shipping terms
c correct This is often the same as the bill of lading date
d incorrect Under accrual accounting, the company doesn’t have to wait for the check to
record revenue7.31 a Incorrect This would not have the outstanding balance; however, there are some times
when the auditor confirms the sale instead of the amount receivable
b Correct This would have the balance for confirming
c Incorrect This would not have the individual customer balance
d Incorrect This would not have the balance outstanding
7.32 a Incorrect This is an essential part of the cycle
b Incorrect This is an essential part of the cycle
c Incorrect Cash is affected by the collections
d Correct Even though this involves shipments, it is considered part of the expenditure and
disbursement cycle7.33 a Incorrect The sale could occur but not be approved for credit
b Incorrect The approval has nothing to do with completeness
c Correct Credit approval helps ensure the sale will be collectible
d Incorrect Credit approval will not affect when revenue is earned
7.34 a Incorrect The general ledger bookkeeper doesn’t have access to the customer accounts
b Incorrect There’s no advantage to separating access to checks and currency
c Correct Nobody in the company has access to cash, therefore it cannot be stolen
d Incorrect Normally checks are made payable to company That doesn’t prevent lapping.7.35 a Correct Impropriety of write-offs can be controlled by the review and approval by
someone outside the credit department
b Incorrect Even write-off of old receivables can conceal a cash shortage
c Incorrect The cashier could be the cause of the shortage
d Incorrect Write offs should be separated from the sales function
7.36 a Incorrect This would increase gross profit
b Correct Less sales revenue and correct amount of cost of goods sold results in less gross
profit, therefore the ratio of gross profit to sales will decrease (Actually, the gross profit numerator will decrease at a greater rate than the sales denominator
in the ratio, causing the ratio to decrease.)
c Incorrect This would increase gross profit
d Incorrect This would increase sales and cost of sales, and the ratio would not change If
cost of sales is not recorded, gross profit would increase
Trang 77.37 a Incorrect This doesn’t verify that the sales invoices represent actual shipments.
b Incorrect This would require tracing from shipping documents to invoices
c Incorrect This would require tracing from invoices to customer accounts
d Correct The direction of the test establishes support for recorded amounts
7.38 a Incorrect Using the sales returns account would raise the least suspicion because this
account is more commonly linked to accounts receivable
d Correct A bookkeeper could steal money and “write off” to unsuspecting customer’s
balance with a fictitious “sales return.”
7.39 a Incorrect The payment is probably in transit
b Incorrect The shipment is probably in transit
c Correct This should have been recorded as a reduction to the receivable by 12/31
d Incorrect This occurred after the end of the period
7.40 a Incorrect The aged trial balance provides only indirect evidence about controls
b Incorrect The aged trial balance provides no evidence about accuracy
c Correct The age of accounts is an indication of credit losses
d Incorrect The aged trial balance provides no evidence about existence
7.41 a Incorrect Lapping pertains to cash receipts, not sales
b Correct False sales journal entries made near the end of the year may have shipping or
other documents that reveal later dates or show lack of sufficient documentation
c Incorrect See answer a
d Incorrect This step would not detect misappropriation of merchandise
7.42 a Incorrect Receiving a confirmation is not proof the customer will pay
b Incorrect Confirmation will not detect if the receivables were sold or factored
c Correct Accounts receivable confirmation enables recipients to respond that they owe
the company or that they dispute or disagree with the amount the company says they owe
d Incorrect Confirmation provides only indirect evidence that controls are working
7.43 c Correct Checking the sequence for missing numbers identifies documents not yet fully
processed in the revenue cycle It does not provide evidence about accuracy, off or occurrence
cut-7.44 a Correct The accounts receivable debits are supposed to represent sales that have been
ordered by customers and actually shipped to them
b Incorrect This is not evidence about occurrence
c Incorrect This provides some evidence about existence, but even if the receivables haven’t
been paid, they may still be valid
d Incorrect These file will likely not provide evidence about specific sales
7.45 a Incorrect This is an important assertion, but financial statement users are less likely to be
damaged if assets are found that have not been recorded
b Correct Financial statement users are more likely to be damaged if assets are found not
to exist
c Incorrect Ownership is important, but doesn’t matter if the assets don’t exist
d Incorrect Presentation and disclosure assertion is important, but not as important as
existence for asset accounts
Trang 87.46 c Correct Mainly because the other three choices are listed as appropriate work to do
Also, customers are likely to ignore negative confirmations after earlier responding to positive confirmations
b Incorrect The auditor assumes customers are likely to respond to errors
c Incorrect Because negative confirmations offer higher risk of material misstatement
should be low when they are used
d Incorrect Because negative confirmations offer higher detection risk, risk of material
misstatement should be low when they are used
7.48 a Correct Shipments are traced to customers’ invoices (This does not imply that the
invoices were recorded in the sales journal.)
b Incorrect See (a) above The invoice copies need to be traced to the sales journal and
general ledger to determine whether the shipments were recorded as sales
c Incorrect Recorded sales were shipped is not established because the sample selection is
from shipments, not from recorded sales
d Incorrect See (c) above
7.49 a Incorrect Salespeople could write off accounts for their friends to keep them from having
to pay
b Incorrect The credit manager may propose write-offs to reduce days outstanding and make
him/her look better
c Correct The Treasurer or another high-ranking manager should approve write-offs
d Incorrect The cashier could take receipts and write-off the balance
7.50 a Incorrect A second request is the first step that should be performed
b Correct As the confirmations are a sample of the account balance, even immaterial items
should be followed up as they represent other balances in the universe of receivables
c Incorrect Shipping documents should be examined to test existence of the receivable
d Incorrect Client correspondence files may also provide evidence the receivable exists.7.51 a Correct Not recording sales on account in the books of original entry is the most
effective way to conceal a subsequent theft of cash receipts The accounts will
be incomplete but balanced, and procedures applied to the accounting records will not detect the defalcation
b Incorrect The control account wouldn’t match the total of customer accounts
c Incorrect Customers would catch the overstatement when examining their statements
d Incorrect This is a possibility, but (a) is a better answer There is less likelihood of getting
caught if the sale is never recorded
7.52 a Incorrect The stolen cash wouldn’t be in either of these documents
b Incorrect Lapping is not accomplished through write-offs
c Correct Lapping is the delayed recording of cash receipts to cover a cash shortage
Current receipts are posted to the accounts of customers who paid one or two days previously to avoid complaints (and discovery) when monthly statements are mailed The best protection is for the customers to send payments directly to the company’s depository bank The next best procedure is to assure that the accounts receivable clerk has no access to cash received by the mail room Thus,the duties of receiving cash and posting the accounts receivable ledger are segregated
d Incorrect See answer (a)
Trang 97.53 a Incorrect A negative confirmation might be used if control risk is low.
b Correct As detection risk is lower for positive confirmations than negative
confirmations, a positive confirmation is more likely when inherent risk is high
c Incorrect Whether the account is due or not usually doesn’t affect the type of
confirmation However if it is long past due, a positive confirmation is more appropriate
d Incorrect This is a possible choice; however, even positive confirmations may be
problematic with related parties
SOLUTIONS FOR EXERCISES, PROBLEMS, AND SIMULATIONS
7.54 Control Objectives and Procedures Associations
a “Occurrence” Sales recorded, goods not shipped
b “Completeness” Goods shipped, sales not recorded
c “Accuracy” Goods shipped to a bad credit risk customer
d “Accuracy” Sales billed at the wrong price or wrong quantity
e “Classification” Product line A sales recorded as Product line B
f “Completeness” Failure to post charges to customers for sales
g “Cutoff” January sales recorded in December
CONTROL PROCEDURES
7 General ledger code checked for sales product lines X
9 Periodic sales total compared to same period accounts
receivable postings
X
10 Accountants have instructions to date sales on the date of
11 Sales entry date compared to shipping doc date X
12 Accounts receivable subsidiary totaled and reconciled to
13 Intercompany accounts reconciled with subsidiary company
Trang 107.54 Control Objectives and Procedures Associations (Continued)
EXHIBIT 7.54-1 Blank form for Students
a Sales recorded, goods not shipped
b Goods shipped, sales not recorded
c Goods shipped to a bad credit risk customer
d Sales billed at the wrong price or wrong quantity
e Product line A sales recorded as Product line B
f Failure to post charges to customers for sales
g January sales recorded in December
CONTROL PROCEDURES
1 Sales order approved for credit
2 Prenumbered shipping doc prepared sequence checked
3 Shipping document quantity compared to sales invoice
4 Prenumbered sales invoices, sequence checked
5 Sales invoice checked to sales order
6 Invoiced prices compared to approved price list
7 General ledger code checked for sales product lines
8 Sales dollar batch totals compared to sales journal
9 Periodic sales total compared to same period accounts
receivable postings
10 Accountants have instructions to date sales on the date of
shipment
11 Sales entry date compared to shipping doc date
12 Accounts receivable subsidiary totaled and reconciled to
accounts receivable control account
13 Intercompany accounts reconciled with subsidiary company
records
14 Credit files updated for customer payment history
15 Overdue customer accounts investigated for collection
7.55 Control Assertion Associations
Sales recorded, goods not shipped Occurrence
Goods shipped, sales not recorded Completeness
Goods shipped to a bad credit risk
Failure to post charges to customers
January sales recorded in December Cutoff
Trang 117.56 Client Control Procedures and Audit Tests of Controls
For each client control activity numbered 1-15, write an auditor’s test of control procedure that could produce evidence on the question of whether the client’s control has been installed and is in operation.Sales Invoice Sample: Select a sample of random numbers representing recorded sales invoices, and1(a) Inspect the attached sales order for credit approval signature
1(b) Trace customer to up-to-date credit file/information underlying the credit approval
14 Note whether credit files are updated for customer payment history
2 Inspect the attached shipping document for (i) existence, and (ii) prenumbering imprint
3 Compare billed quantity on sales invoice to shipped quantity on shipping document
4 Find the sales invoice associated with the random number (failure to find means an invoice wasn’t
recorded) Alternatively, use computer to add up the recorded sales invoice numbers and compare
to a sum of digits check total
5 Compare sales invoice to sales order for quantity, price, and other terms
6 Compare prices on sales invoice to approved price list
7 Check product line code for proper classification compared to products invoices
11 Compare invoice date to shipping document date
Other
2 Count the number of shipping documents (subtract beginning number from ending number) and
compare to same-period count of sales invoices (to look for different number of documents)
2 Select a sample of random numbers representing shipping documents and look for them in the
shipping document file
2 Computer-scan the shipping document file for missing numbers in sequence
2 Use computer to add the shipping document numbers entered in the files and compare to a
computed sum of digits check total
8 Find client’s sales dollar batch totals, recalculate the total, and compare to sales journal of the
relevant period
9 Use the same sales dollar batch totals for comparison to separate total of accounts receivable
subsidiary postings, if available
10 Study the accounting manual and make inquiry about accountants’ instructions to date sales on
date of shipment
12 Obtain client’s documentation showing A/R subsidiary total reconciled to A/R control account
Alternatively, add up the subsidiary and compare to the control account
Trang 1213 Obtain client’s documentation showing reconciliation of intercompany receivables and payables
for sales and purchases Alternatively, confirm balances with subsidiaries or other auditors.7.56 Client Control Procedures and Audit Test of Control Procedures (Continued)
14 Select a sample of credit files and trace to customers’ accounts receivable, noting extent of up-date
for payment history
15 Study client correspondence on investigation and collection efforts on overdue customer accounts,
noting any dispute conditions If no effort is made, follow up overdue accounts with audit procedures (confirmation, determine existence of debtor in directories, etc.)
7.57 Confirmation of Trade Accounts Receivable
a Auditing standards presume that auditors will request confirmation of the client’s accounts
receivable An auditor can justify omitting these confirmations if:
1 The accounts receivable are immaterial to the financial statements
2 The expected response rates to properly designed confirmation requests will be
inadequate, or responses are expected to be unreliable, hence the confirmation procedureswould be ineffective
3 The evidence expected to be provided by analytical procedures or other substantive
procedures is sufficient to reduce audit risk to an acceptably low level for the applicable financial statement assertions
b These factors will affect the reliability of confirmations:
1 The confirmation form Some positive forms request agreement or disagreement with
information stated on the form Other positive forms, known as blank forms, request the respondent to fill in the balance or furnish other information Negative forms request a response only if the recipient disagrees with the information stated on the request
2 The auditor’s prior experience with this client or similar clients is also likely to affect
reliability because the auditor will have prior knowledge of the expected confirmation response rates, inaccurate information on prior years’ confirmations, and misstatements identified during prior audits
3 The nature of the information being confirmed may affect the competence of the
evidence obtained as well as the response rate For example, this client’s customers’ accounting systems may permit confirmation of individual transactions, but not account balances, or vice versa
4 Sending the confirmation requests to the proper respondents will likely provide
meaningful and competent evidence Each request should be sent to a person the auditor believes is knowledgeable about the information to be confirmed
7.57 Confirmation of Trade Accounts Receivable (Continued)
c The nature of the alternative procedures the auditor can apply when replies to positive
confirmation requests are not received varies according to the account and assertion in question Possible alternative procedures include:
Trang 131 Examining subsequent cash receipts and matching such receipts with the actual items
being paid
2 The auditor can also consider inspecting the client’s customers’ purchase orders on file
and related shipping documents
3 Inspecting correspondence between the client and its customers could provide additional
evidence
4 The auditor may also establish the existence of the client’s customers by reference to
credit sources such as Dun & Bradstreet or other sources of identification (e.g., telephonebook, business directories, state incorporation files)
7.58 Audit Objectives and Procedures for Accounts Receivable
a Accounts receivable represent all amounts owed to the client company at the balance sheet date
2 Perform sales cut-off tests to obtain assurance that sales transactions and corresponding
entries for inventories and cost of goods sold are recorded in the same and proper period
b The client company has legal right to all accounts receivable at the balance sheet date
5 (best) Review loan agreements for indications of whether accounts receivable have
been factored or pledged
4 (possible) Obtain an understanding of the business purpose of transactions that resulted in
accounts receivable balances
c Accounts receivable are stated at net realizable value
3 Review the aged trial balance for significant past due accounts
d Accounts receivable are properly described and presented in the financial statements
6 (best) Review the accounts receivable trial balance for amounts due from officers and
employees
4 (possible) Obtain an understanding of the business purpose of transactions that resulted in
accounts receivable balances
Trang 147.59 Overstated Sales and Accounts Receivable
Tests of Controls:
Questionnaires and inquiries should be used to determine the company’s accounting policies If the auditors
do not know about “bill and hold” practices, they should learn the details For detail procedures: Select a sample of recorded sales, and examine them for any signs of unusual sales terms Vouch them to customer orders and other sales agreements, if any Vouch them to shipping documents, and examine the documents for external reliability—recognizing blank spaces (carrier name, date) and company representative’s signature (two places, both company and carrier) Compare prices asked in customers’ orders to prices
charged on invoices These tests follow the vouching direction—starting with data that represent the final
recorded transactions (sales) and going back to find originating supporting source documents These procedures might reveal some transactions of the problem types—bill and hold, and overbilling The last month of the fiscal year (although a typical seasonal low month) could be targeted for greater attention because the sales are much higher than the previous January and because the auditors want to pay attention
to sales cut-off in the last month
Select a sample of shipping documents, trace them to customer orders, and trace them to invoices and to
recording in the accounts receivable with proper amounts on the proper date These tests follow the tracing direction—starting with data that represent the beginning of transactions (orders, shipping) and tracing
them through the company’s accounting process If extra attention is given in January for cut-off reasons, this sample might reveal some of the problem transactions
Audit of Balance:
Confirm a sample of customer accounts Follow up exceptions noted by customers relating to bill and hold terms, excessive prices, and double billing Even a few exceptions raise red flags for the population of receivables
Use analytical comparison on comparative month’s sales Investigate any unusual fluctuations (e.g Januarythis year much larger than January last year, the reversal month next year with negative sales) The January comparative increase in sales should cause auditors to extend detail procedures on some of the month’s transactions