Testing Accounts Receivable*
Testing Accounts Receivable
*Includes some excerpts from the PPC Audits of Nonpublic Companies (1/08)
Accounts Receivable & Disclosure Tab
Accounts Receivable & Disclosure Tab
• Input the reconciliation of the A/R report to the p
/
p
general ledger
• Report Aging Bucket Testing
– A/R aging reports will detail all of the outstanding invoices by customer and age them, generally according to current, 30 days old, 31‐60 days old, 61‐90 days old, 91‐120 days old and 120+ days old as of a certain date.
– To determine that the software is working properly, you ,
y
will select 1 invoice from each of the current, 30 days and 31‐60 days “buckets”, document your selections and conclude that the invoices are aged properly.
Accounts Receivable & Disclosure Tab (cont.)
Accounts Receivable & Disclosure Tab (cont.)
• A/R concentration for disclosure
– We are required to disclose in the financial statements those customers whose total A/R balances are >= 10% of total A/R, gross excluding the allowance for doubtful accounts, at period end.
end
– You will scan the A/R aging report to document the amounts >= 10% after calculating the disclosure threshold
• Be
Be sure to select all of the balances for the same customers sure to select all of the balances for the same customers –
sometimes a company may invoice separate divisions of the same customer and the balances will need to be added together for the disclosure.
• SIGNIFICANT CUSTOMERS (financial statement disclosure example)
SIGNIFICANT CUSTOMERS (financial statement disclosure example)
– The Company had two customers that accounted for 35% of its revenues during the year ended December 31, 2008 and 39% of trade accounts receivable at December 31, 2008. The Company had five customers that accounted for 43% of its revenues during the year ended December 31, 2007 and 54% of trade accounts receivable at December 31 2007
and 54% of trade accounts receivable at December 31, 2007.
Accounts Receivable & Disclosure Tab (cont.)
Accounts Receivable & Disclosure Tab (cont.)
• Related
Related party receivables information for party receivables information for
disclosure
– We
We are required to disclose in the financial statements are required to disclose in the financial statements
all related party receivable balances that are material.
• Go to the Planning Memo to view the list of related parties.
• Scan the A/R aging report at period end and extract the related party balances
• Also scan the general ledger for Also scan the general ledger for “other
other receivables
receivables” to see if to see if
other related party balances exist at period end
– Ex. Notes receivable from owners; advances to related parties
Accounts Receivable & Disclosure Tab (cont.)
Accounts Receivable & Disclosure Tab (cont.)
• Scan
Scan the A/R aging report, noting whether the A/R aging report noting whether
there are any unusual items or material credit customer balances that should be reclassed to
customer balances that should be reclassed to payables at year‐end.
– Inquire regarding unusual items (does not meet Inquire regarding unusual items (does not meet
your expectations)
– Post an AJE to reclass any material credit Post an AJE to reclass any material credit
customer balances to accounts payable.
Accounts Receivable Confirmation Testing
Accounts Receivable Confirmation Testing
Accounts Receivable Confirmation Testing (cont.)
(
)
• What
What is usually the best way to test the is usually the best way to test the
accounts receivable balance at period end?
– Send A/R confirmations to certain customers
Send A/R confirmations to certain customers
• May confirm accounts receivable balances or accounts receivable invoices
– Whichever is most efficient
• This is an audit requirement although there can be certain exceptions but they will be rare
certain exceptions but they will be rare.
Accounts Receivable Confirmation Testing (cont.)
(
)
• Procedures
Procedures to select accounts receivable to select accounts receivable
confirmations
– 65% coverage OR
65% coverage OR
– Sampling OR
– A combination of coverage and sampling
A combination of coverage and sampling
• See Sampling Selection power point presentation
Accounts Receivable Confirmation Testing (cont.)
(
)
• Once the testing sample is selected, the list is g
p
,
provided to the client.
• The client prepares confirmation letters that MUST be e/mailed directly to the customers by
MUST be e/mailed directly to the customers by the auditor. The client must not mail these confirmations for you so that you can control the mailing.
• Responses from client will be classified as:
– Returned, no exception
R t
d
ti
– Returned, exception cleared
– No reply
py
What Do You Do When the Confirmation is Returned with No Exceptions?
d ih
i ?
• No exceptions means the following:
o e cept o s ea s t e o o g:
– The customer signed and returned the confirmation to you with no exceptions/problems documented in the l tt
letter.
• The customer agrees that the balance in the letter matches its internal records.
– The customer signed and returned the confirmation to you with a change in the balance documented in the letter BUT IT IS IMMATERIAL
letter BUT IT IS IMMATERIAL.
• Cross reference the audit confirmation (pdf of letter or email) to the confirmation testing tab.
)
g
What Do You Do When the Confirmation is Returned with An Exception?
d ih
i ?
•
An exception means the following:
– The customer did not agree with the accounts receivable balance in the letter h
dd
h h
bl b l
h l
IN A MATERIAL AMOUNT.
•
Investigate the difference and determine whether you feel the customer is correct. If so, there may be an AJE posted but you may not be able to make that determination until after the A/R testing is complete.
/
– Often, exceptions are related to timing differences. These are not considered true customer exceptions and the explanation should be documented in a text box or comment in the pdf of the letter.
• Ex. You send a confirmation of an A/R balance of $10,000 at 12/31/08 but the customer says that the balance is actually $8,000. Why might this happen?
• Answer: The customer often makes payments before period end that are not yet received by the client under audit which results in a timing difference.
• If the difference is material, vouch the payment in the client’s records and explain the t e d e e ce s ate a , ouc t e pay e t t e c e t s eco ds a d e p a t e
situation in the pdf of the confirmation. You would conclude that the confirmation actually agrees as a result of the timing difference.
•
Cross reference the audit confirmation (pdf of letter or email) to the confirmation testing tab.
What Do You Do When there is No Reply?
What Do You Do When there is No Reply?
• Perform
Perform alternative procedures on the alternative procedures on the
balance you tried to confirm.
• There is no need to keep blank copies of the There is no need to keep blank copies of the
confirmation in the audit file when it is not returned.
returned
What Are Alternative Procedures?
What Are Alternative Procedures?
• Consider if the balance of the confirmations not received is covered by the allowance for doubtful accounts. You may be able to stop your work here but this situation does not happen very
here but this situation does not happen very often.
– You must discuss this with the RP if you think this is the case.
th
• Vouch subsequent collections
– If
If the customer paid for the invoice in the following the customer paid for the invoice in the following
year, then the auditor can reasonably assume that the outstanding accounts receivable balance at period end is valid and collectible
end is valid and collectible.
What if There Are No Subsequent Collections b f
before the End of Audit Fieldwork?
h E d f A di Fi ld
k?
• If the client sells goods
– Review support to determine that title transferred before the end of the period for the balance/invoices confirmed.
• This confirms that the accounts receivable is a valid invoice at period end.
• Usually this consists of shipping documents
• If the client provides services
– Review support to determine that the services were provided before the end of the period for the balance/invoices confirmed.
• This confirms that the accounts receivable is a valid invoice at period end.
• Usually this consists of a work ticket, time sheet support, etc.
Other Issues
Other Issues
• Sometimes you will find that a credit memo was issued in the subsequent period
b
t
i d
• This should be documented under “other”
– Ex. You sent a 12/31/08 A/R confirmation for $50,000 to a customer. The customer signed the letter and returned it to you but stated “The
The customer signed the letter and returned it to you but stated, The balance at 12/31/08 was $30,000. We were issued a credit of $20,000 in 1/09. What is the classification of this A/R response? How would you complete the confirmation spreadsheet?
– Answer 1: Confirmed, exception cleared.
A
1 C fi
d
ti
l
d
– Answer 2: $30,000 was the amount confirmed; $20,000 will be listed in other – you will have to vouch the credit memo and identify the work performed as a comment in the spreadsheet cell.
• The remaining balance will be the “Amount Untested” and the auditor will consider how to further test this balance if material.
• You will split your list between significant items and sampled items.