Completing the Tests in
the Sales and Collection
Cycle:
Accounts Receivable
Chapter 16
Learning Objective 1
Describe the methodology for
designing tests of details of
balances using the audit
risk model.
Accounts Receivable Balance-Related
Audit Objectives
Detail tie-in
Existence
Completeness
Accuracy
Classification
Cutoff
Realizable
value
Rights
Presentation
and disclosure
Methodology for Designing Tests
of Details of Balances for A/R
Phase I
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.
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
Design and perform analytical procedures for
accounts receivable balance.
Design tests of details of accounts receivable
balance to satisfy balance-related audit objectives.
Audit
Sample
procedures size
Items to
select
Timing
Relationship Between Sales and Accounts
Receivable
Existence
Completeness
Accuracy
Classification
Timing
Posting/Summary
×
×
×
×
×
×
Presentation
and disclosure
Rights
Realizable
value
Cutoff
Classification
Accuracy
Completeness
Sales
Existence
Translation-related
audit objectives
Detail tie-in
Accounts receivable balance-related audit objectives
Relationship Between Sales and Accounts
Receivable
Existence
Completeness
Accuracy
Classification
Timing
Posting/Summary
×
×
×
×
×
×
Presentation
and disclosure
Rights
Realizable
value
Cutoff
Classification
Accuracy
Completeness
Cash receipts
Existence
Translation-related
audit objectives
Detail tie-in
Accounts receivable balance-related audit objectives
Learning Objective 2
Design and perform analytical
procedures for accounts in the
sales and collection cycle.
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
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
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
Selected Comparative Information
Sales
Gross margin
Accounts receivable
Bad debt expense
Total current assets
Total assets
Net earnings
Number of accounts
receivable
Number of accts. rec. with
balances over $100,000
Percent
Percent
change
change
12/31/04 2003- 12/31/03 2002($000)
2004
($000)
2003
12/31/02
($000)
144,328
39,845
20,197
3,323
51,027
61,367
5,681
9.0
9.6
7.3
(2.1)
14.0
(7.0)
21.9
132,421
36,350
18,827
3,394
44,779
66,021
4,659
7.0
7.0
14.1
7.3
6.6
8.0
39.0
123,737
33,961
16,505
3,162
41,989
61,147
3,351
258
16.7
221
5.7
209
37
15.6
32
6.7
30
Analytical Procedures: Sales and
Collection Cycle
12/31/04 12/31/03 12/31/02
Gross margin/net sales
Sales returns and allowances/
gross sales
Bad debt expense/net sales
Allowance for uncollectible
accounts/accounts receivable
Number of days receivables
outstanding
Net accounts receivable/
current assets
27.85%
27.70%
27.68%
0.90%
2.30%
0.90%
2.60%
0.90%
2.60%
6.10%
7.50%
6.40%
48.09
47.96
49.32
37.20%
32.50%
32.30%
Design and Perform Tests of Details of A/R
Balance (Phase III)
Planned detection risk for each objective
is an auditor decision.
Combining the factors that determine
planned detection risk is complex.
Analytical Procedures for Gross Margin
Gross margin percent
2005
2004
2003
Great
Great
Great
Western Industry Western Industry Western Industry
Hardwood
Softwood
Plywood
36.3
23.9
40.3
32.4
22.0
50.1
36.4
20.3
44.2
32.5
22.1
54.3
36.0
20.5
45.4
32.3
22.3
55.6
Learning Objective 3
Design and perform tests of
details of balances for accounts
receivable for each balancerelated audit objective.
Designing Tests of Detail
of Balances
Accounts receivable are correctly added and
agree with the Master File and the General
Ledger (aged trial balance).
Recorded accounts receivable exist
Existing accounts receivable are included
Designing Tests of Detail
of Balances
Accounts receivable are accurate
Accounts receivable are properly classified
Cutoff for accounts receivable is correct
Designing Tests of Detail
of Balances
Accounts receivable is stated at realizable value
The client has rights to accounts receivable
Accounts receivable presentation and
disclosures are proper
Learning Objective 4
Obtain and evaluate accounts
receivable confirmations.
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.
Type of Confirmation
Positive confirmation
Blank confirmation form
Invoice confirmation
Negative confirmation
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.
Sample Size
Tolerable misstatement
Inherent risk
Control risk
Achieved detection risk from
other substantive tests
Type of confirmation
Selection of the Items for Testing
When selecting a sample of accounts receivable
for confirmation, the auditor should be careful
to avoid being influenced by the client.
Selection of Items for Testing
If a client tries to discourage the auditor from
sending confirmations to certain customers,
the auditor should consider the possibility
that the client is attempting to conceal
fictitious or known misstatements
of accounts receivable.
Maintaining Control
After the items for confirmation have been
selected, the auditor must maintain control
of the confirmations until they are returned
from the customer.
Follow-up on Nonresponses
When positive confirmations are used,
SAS 67 requires follow-up procedures
for confirmations not returned by
he customer.
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 file.
Duplicate Sales Invoices
These are useful in verifying the actual
issuance of a sales invoice and the
actual date of the billing.
Shipping Documents
These are important in establishing
whether the shipment was actually
made and as a test of cutoff.
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.
Analysis of Difference
Payment has already been made
Goods have not been received
The goods have been returned
Clerical errors and disputed accounts
Drawing Conclusions
Reevaluate internal control.
Evaluate the qualitative nature of
misstatements.
Determine whether sufficient evidence
was obtained.
Learning Objective 5
Design audit procedures for the
audit of accounts receivable,
using an evidence planning
worksheet as a guide.
Source of Each Row in the Evidence
Planning Worksheet
Tolerable misstatement
 Acceptable audit risk
 Inherent risk
 Control risk
 Substantive tests of
transactions results
 Analytical procedures
 Planned detection risk and
planned audit evidence
