Completing the Tests in the
Sales and Collection Cycle:
Accounts Receivable
Chapter 12
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12 - 1
Learning Objective 1
Describe the methodology
for designing tests of details
of balances using the
audit risk model.
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Accounts Receivable BalanceRelated Audit Objectives
Detail tie-in
Existence
Completeness
Accuracy
Realizable
value
Classification
Rights and
obligations
Cutoff
Presentation
and disclosure
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Methodology for Designing Tests of
Balances – Accounts Receivable
Identify client business risks
affecting accounts receivable.
Set tolerable misstatement
and assess inherent risk
for accounts receivable.
Assess control risk for sales
and collection cycle.
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Methodology for Designing Tests of
Balances – Accounts Receivable
Design and perform tests of
controls and substantive tests
of transactions for sales and
collection cycle.
Design and perform analytical
procedures for accounts
receivable balance.
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Methodology for Designing Tests of
Balances – Accounts Receivable
Design tests of details of
accounts receivable balance
to satisfy balance-related
audit objectives.
Audit procedures
Sample size
Items to select
Timing
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Existence
Completeness
Accuracy
Classification
Timing
Posting/Summary ×
Rights
Presentation
and disclosure
Cutoff
Realizable
value
Classification
Accuracy
Sales
Completeness
Translation-Related
Audit Objectives
Existence
Accounts Receivable
Balance-Related
Audit Objectives
Detail tie-in
Relationship Between Sales and
Accounts Receivable
×
×
×
×
×
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Existence
Completeness
Accuracy
Classification
Timing
Posting/Summary ×
Rights
Presentation
and disclosure
Cutoff
Realizable
value
Classification
Accuracy
Cash receipts
Completeness
Translation-Related
Audit Objectives
Existence
Accounts Receivable
Balance-Related
Audit Objectives
Detail tie-in
Relationship Between Sales and
Accounts Receivable
×
×
×
×
×
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Learning Objective 2
Design and perform analytical
procedures for accounts in the
sales and collection cycle.
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Analytical Procedures for the Sales
and Collection Cycle
Gross margin percentage with previous years
Sales by month over time
Sales returns and allowances as a percentage
of gross sales with previous years
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Analytical Procedures for the Sales
and Collection Cycle
Individual customer balances over a stated amount
Bad debt expense as a percentage of gross sales
Days that accounts receivable are outstanding
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Analytical Procedures for the Sales
and Collection Cycle
Aging category as a percentage of receivables
Allowance for uncollectible accounts
as a percentage of accounts receivable
Charge-off of uncollectible accounts
as a percentage of total accounts receivable
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Selected Comparative Information
2002
(000)
Sales
144.3
Gross margin
39.8
Accounts receivable 20.2
Bad debt expense
3.3
Total assets
61.4
Net earnings
5.7
Number of accounts
receivable
258
Percent
Change
02-01
9.3
9.3
7.4
(2.9)
(7.0)
21.3
16.7
2001
(000)
132.0
36.4
18.8
3.4
66.0
4.7
221
Percent
Change
00-01
6.5
7.1
13.9
9.7
8.0
38.2
5.7
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2000
(000)
124.0
34.0
16.5
3.1
61.1
3.4
209
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Analytical Procedures
Sales and Collection Cycle
2002
27.8%
.9%
2.3%
Gross margin/net sales
Sales R&A/gross sales
Bad debt expense/net sales
Allowance for uncollectible
accounts/accounts receivable 6.1%
Number of days receivables
outstanding
51.5
Net accounts receivable/
current assets
37.2%
2001
27.7%
.9%
2.6%
2000
27.5%
.8%
2.4%
8.2%
8.4%
52.3
51.2
38.6%
36.0%
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12 - 14
Design and Perform Tests of Details
of A/R Balance (Phase III)
Planned detection risk for each
objective is an auditor’s decision.
Combining the factors that determine
planned detection risk is complex.
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Analytical Procedures
for Gross Margin
Hardwood
Softwood
Plywood
Gross Margin Percent
2002
2001
Client Industry
Client Industry
36.3
32.4
36.4
32.5
23.9
22.0
20.3
22.1
40.3
50.1
44.2
54.3
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Learning Objective 3
Design and perform tests of
details of balances for accounts
receivable for each balancerelated audit objective.
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Designing Tests of
Detail of Balances
Aged trial balance
Recorded accounts receivable exist
Existing accounts receivable are included
Accounts receivable are accurate
Accounts receivable are properly classified
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Designing Tests of
Detail of Balances
Cutoff for accounts receivable is correct
Accounts receivable is stated at realizable value
The client has rights to accounts receivable
Accounts receivable presentation
and disclosures are proper
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Learning Objective 4
Obtain and evaluate accounts
receivable confirmations.
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AICPA Requirements
1. Accounts receivable are immaterial.
2. The auditor considers confirmations
ineffective evidence because response
rates will likely be inadequate or unreliable.
3. The combined level of inherent risk and
control risk is low and other substantive
evidence can be accumulated to provide
sufficient evidence.
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Type of Confirmation
Positive confirmation
Blank confirmation form
Invoice confirmation
Negative confirmation
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Timing
The most reliable evidence from
confirmations is obtained when
they are sent as close to the balance
sheet date as possible, as opposed
to confirming the accounts several
months before year-end.
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Sample Size
Tolerable misstatement
Inherent risk
Control risk
Achieved detection risk from
other substantive tests
Type of confirmation
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Selection of Items
for Testing
When selecting a sample of accounts receivable
for confirmation, the auditor should be careful
to avoid being influenced by the client.
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Selection of Items
for Testing
If a client tries to discourage the auditor from
sending confirmation to certain customers,
the auditor should consider the possibility
that the client is attempting to conceal
fictitious or known misstatements of
accounts receivable.
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Subsequent Cash Receipts
Evidence of the receipt of cash subsequent
to the confirmation date includes examining
remittance advices, entries in the cash receipts
records, or perhaps even subsequent credits in
the accounts receivable master files.
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Duplicate Sales Invoices
These are useful in verifying
the actual issuance of a sales
invoice and the actual date
of the billing.
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Shipping Documents
These are important in establishing
whether the shipment was actually
made and as a test of cutoff.
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Correspondence
With the Client
Usually, the auditor does not need to review
correspondence as a part of alternative
procedures, but correspondence can
be used to disclose disputed and
questionable receivables not
uncovered by other means.
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Analysis of Difference
Payment has already been made
Goods have not been received
The goods have been returned
Clerical errors and disputed accounts
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Drawing Conclusions
Reevaluate internal control.
Evaluate the qualitative nature of misstatements.
Determine whether sufficient evidence was obtained.
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Learning Objective 5
Design audit procedures for the
audit of accounts receivable,
using an evidence planning
worksheet as a guide.
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Source of Each Row in the
Evidence Planning Worksheet
Tolerable
misstatement
Acceptable
audit risk
Inherent risk
Control risk
Substantive tests
of transactions
results
Planned detection
risk and planned
audit evidence
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12 - 34
Developing Tests of Details
Audit Program
The development of audit program
procedures for tests of details in the
sales and collection cycle is based
on the results of the analytical
procedures, tests of controls, and
substantive tests of transactions.
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End of Chapter 12
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