Chapter 16
Completing the Tests in
the Sales and Collection Cycle
Accounts Receivable
1
The introduction
… she discovered that a new real-time
system for processing sales
transactions had been implemented
Susan’s substantive tests of
transactions identified misstatements.
2
Analytical Procedures Planning
3
Substantive Analytical Planning
4
Polina
What is the objective of AU-C section 500?
5
AU-C 500
Audit Evidence
.04 The objective of the auditor is to design and
perform audit procedures that enable the
auditor to obtain sufficient appropriate audit
evidence to be able to draw reasonable
conclusions on which to base the auditor's
opinion.
6
Esther
How does detection risk get reduced ?
7
Karli
what is the audit risk model ?
8
Audit Risk Model
AAR IR CR PDR
AAR RoMM PDR
rearrange PDR 
AAR
RoMM
the required level of DR is a function of the CR assessment
PDR  f (CR ) 
c
CR
if PDR  high  limited Substantiv e Tests
if PDR  low  extensive Substantiv e Tests
9
Suiting
pretend GAAS requires AAR ≤ .05
Controls are ineffective, we assess CR (RoMM) as MAX
Which audit approach are we going to take ?
10
Catherine
pretend GAAS requires AAR ≤ .05
Controls are ineffective, we assess CR as MAX (1.00)
We are taking the Primarily Substantive Approach
What is the Planned Detection Risk ?
11
Sandra
pretend GAAS requires AAR ≤ .05
Controls are effective, not great but
Somewhat effective and
we assess CR (RoMM) as 0.25
What is the Planned Detection Risk ?
12
Chesley
pretend GAAS requires AAR ≤ .05
Controls are effective, not great but
somewhat effective and
we assess CR (RoMM) as 0.25
Which audit approach will we take?
13
Alisha
pretend GAAS requires AAR ≤ .05
Controls are effective, we assess CR (RoMM) as 0.03
Which audit approach will we take ?
14
Tracy
pretend GAAS requires AAR ≤ .05
Controls are effective, we assess CR (RoMM) as 0.03
We will take the Reduced Level of Control Risk Approach
What is the Planned Detection Risk ?
15
Alejandro
Which assertions relate to Account Balances?
16
17
Daniel
Describe Vouching
Describe Tracing
18
Michael
If we are auditing assets
are we most concerned with
overstatement
or understatement
19
Elaine
If we are auditing LIABILITIES
are we most concerned with
overstatement
or understatement
20
Steve
If we are auditing Sales or Revenues
are we most concerned with
overstatement
or understatement
21
Dev
If we are auditing EXPENSES
are we most concerned with
overstatement
or understatement
22
Lizzy
T
If we are auditing Accounts Receivable
are we most concerned with
Existence or Completeness
23
Brenda
If we are auditing Cash Receipts
are we most concerned with
Occurrence or Completeness
24
Brian
If we are auditing CASH DISBURSEMENTS
are we most concerned with
Occurrence or Completeness
25
Ryan
M
what are the three types of substantive tests?
26
Analytical Procedures - Substantive
27
aged trial balance
page 285
28
over
90 days
Ace
Applied
Barry
Brandt
Cermetrics
Columbia
Drake
EMC
W&M
Yancey
over
60 days
2,529
1,089
501
815
10,157
over
30 days
balance
1,261
740
1,048
11,876
27,901
8,993
24,441
8,617
4,321
2,954
16,195
16,421
43,840
14,001
63,200
12,431
4,321
3,693
18,504
1,905
2,861
56,706
2,167
9,874
160,537
28,390
13,562
392,136
32,461
27,112
619,537
743
7,310
2,016
15,939
3,176
30,948
3,814
current
29
Eric
with which financial statement assertion
might the aged trial balance be helpful ?
Figure 3
page 285
30
31
AU Section 330
The Confirmation Process
(Supersedes section 331.03.08)
Source: SAS No. 67.
Effective for audits of fiscal periods ending after
June 15, 1992, unless otherwise indicated.
Introduction and Applicability
01 This section provides guidance about the confirmation
process in audits performed in accordance with
generally accepted auditing standards. This section
ù
Defines the confirmation process (see paragraph
.04).
ù
Discusses the relationship of confirmation
procedures to the auditor's assessment of audit
risk (see paragraphs .05 through .10).
ù
Describes certain factors that affect the reliability
of confirmations (see paragraphs .16 through .27).
32
Jeremy
which opinion do we issue
while attempting to confirm the client’s
accounts receivables – the client will not
provide you the necessary information
to confirm many of their largest
customers
33
Ellen
what are two forms of
receivables confirmations ?
34
forms of receivables confirmations ?
positive
blank form
negative
p 291
p 291
35
36
37
Maintaining control of
the confirmation process
38
alternative procedures --- p. 294
subsequent cash receipts
Or
Vouch from Acc Rec subsidiary ledger
to Invoice
to Shipping Doc
to Sales Order
to Customer Order or Purchase Order
39
Valuation & allocation
40
Valuation & allocation
41
Accounts Receivable cut-off 12-31-14
42
Polina
Accounts receivable
Are you going to audit the last 25
entries prior to 12/31/14
or
the first 25 entries after 1/1/15
43
Esther
will you
Vouch or
Trace ?
44
Karli
what does the evidence indicate if we
Vouch the last 25 entries in the
Accounts Receivable account to
shipping documents prior to 12/31/14
45
Suiting
what does the evidence indicate if we
Vouch the last 25 entries in the
Accounts Receivable balance to
shipping documents dated after 1/1/15
46
shipping documents
accounts receivables (& sales) cut-off
at the
loading
dock
47
shipping
documents
goods shipped in
2014
2015
48
Catherine
do you want to audit the last 25 orders
that were actually shipped prior to
12/31/14
or
the first 25 orders that were shipped on
January 1, 2015
49
Sandra
will you
Vouch or
Trace ?
50
Chesley
what would the evidence indicate if you
traced
the first 25 shipments of 2015
into the 2015 Accounts Receivable balance
51
Alisha
what would the evidence indicate if you
traced
the first 25 shipments of 2015
into the 2014 Accounts Receivable balance
52
Tracy
what opinion do we issue
while performing substantive tests you
detect material misstatements that
cause accounts receivable to be
materially overstated
the client refuses to adjust their
financial statements
53
Alejandro
what does it imply about the effectiveness
of the internal controls
while performing substantive tests you
detect material misstatements that
cause accounts receivable to be
materially overstated
54
Cash cut off 12-31-14
55
Nico
Cash Receipts Journal
Are you going to audit the last 25 entries in
CR Jnl the prior to 12/31/14
or
the first 25 entries in the CR Jnl after 1/1/15
56
Elizabeth
W
cash receipts - will you
Vouch or
Trace ?
57
Ryan
H
cash receipts
other than cutoff
with which financial statement assertion
are we most concerned if we are
auditing cash receipts as of Dec. 31st?
58
cash
250
12/31
1/1
450
350
550
200
300
200
275
100
450
100
375
190
300
190
320
59
Giselle
cash receipts
Vouching the last 25 entries in the cash
receipts journal prior to 12/31/14 ?
Give an example of evidence that
indicates the recorded balance is
correct
60
Lauren
cash receipts
Vouching the last 25 entries in the cash
receipts journal prior to 12/31/14 ?
Give an example of evidence that
indicates the recorded balance is
overstated
61
Steffan
Cash Disbursements Journal
will you audit the last 25 entries in the CD Jnl
prior to Dec. 31st
or
the first 25 entries in the CD Jnl after Jan 1st 2015
62
Jennifer
cash disbursements
with which financial statement assertion
(other than cutoff) are we concerned if
we are auditing cash disbursements ?
63
cash
250
450
350
550
200
12/31/2013
1/1/2014
100
375
190
300
200
275
100
450
300
190
320
64
Yu
cash disbursements
Vouching the first 25 entries in the cash
disbursements journal after 1/1/2015 ?
Give an example of evidence that
indicates the recorded balance is
correct
65
Jonathan
cash disbursements
Vouching the first 25 entries in the cash
disbursements journal after 1/1/2015 ?
Give an example of evidence that
indicates the recorded CASH balance is
overstated
66
67
68
69
70
71