Ch 11 Flashcards
Sources of Accounts Receivable
Claims against customers from sale of goods or services.
Loans to officers or employees.
Loans to subsidiaries.
Claims against various other refunds.
Claims for tax refunds.
Advances to suppliers.
AR is shown on the balance sheet at
Net realizable value
What is the nature/what is contained in notes receivables?
Substantial loans to individuals or companies.
Installment note or contract can allow seller to hold lien on goods. Examples:
Sale of industrial machinery, or farm equipment.
Loans to subsidiaries or other types of related companies.
Loans to officers, employees.
Audit risk is significant for receivables because:
Many incidences of fraud have involved overstatement of receivables and revenue.
Revenue recognition may be based on complex accounting rules.
Examples—long term contract accounting
multiple element arrangements
Receivables and revenues are usually subject to valuation using significant accounting estimates.
What are the three “steps” to audit receivables and revenue?
- Use the understanding of the client and its environment to consider inherent risk, including fraud risks, related to receivables and revenues.
- Obtain an understanding of internal control over receivables and revenues.
- Assess the risks of material misstatement and design tests of controls and substantive procedures that:
Assess the risks of material misstatement and design tests of controls and substantive procedures that:
a. Substantiate the existence of receivables and the occurrence of revenue transactions.
b. Establish the completeness of receivables and revenue transactions.
c. Verify the cutoff of revenue transactions.
d. Determine that the client has rights to recorded receivables.
e. Establish the proper valuation of receivables and the accuracy of revenue transactions.
f. Determine that the presentation and disclosure of receivables and revenue are appropriate.
In the control environment, internal control over AR and revenue is important because:
Important because of risk of intentional misstatement of revenue.
Commitment to integrity and ethical behavior.
Are estimates of allowance for doubtful accounts developed in a conscientious manner?
Independence of board and audit committee.
Appropriate structure and lines of responsibility.
Commitment to recruit, develop, and retain competent. employees.
Holding employees accountable.
Risk assessment is important within internal control over AR and revenue because:
Risk of misstatement of revenue may be high based on its nature and complex rules regarding revenue recognition.
Give examples of control activities:
Prepare sales order.
Approve credit.
Issue merchandise from stock.
Shipment.
Billing.
Invoice verification.
Maintenance of control accounts.
Maintenance of customers’ ledgers.
Approval of sales returns and allowances.
Authorization of write-offs of uncollectible accounts.
Two examples of monitoring controls:
Management review controls.
Internal audits.
Match each revenue cycle to its’ corresponding document: Customer purchasing
Purchase order
Match each revenue cycle to its’ corresponding document: Sales
Sales order
Match each revenue cycle to its’ corresponding document: Shipping
Bill of lading
Match each revenue cycle to its’ corresponding document: Billing
Invoice
Match each revenue cycle to its’ corresponding document: Receiving cash receipts.
Control listing
Match each revenue cycle to its’ corresponding document: Authorizing adjustments to accounts receivable
Credit memo
Match each revenue cycle to its’ corresponding control: Sales and collections
Segregation of duties
Match each revenue cycle to its’ corresponding control: Matching of sales invoices and
shipping documents
Match each revenue cycle to its’ corresponding control: clerical accuracy checks on
invoices
Match each revenue cycle to its’ corresponding control: Credit approval for
sales transactions
Match each revenue cycle to its’ corresponding control: mailing of
monthly statements
Match each revenue cycle to its’ corresponding control: reconciliation of
bank accounts
Match each revenue cycle to its’ corresponding control: use of control listing of
cash receipts
Match each revenue cycle to its’ corresponding control: use of budgets and analysis of
variances
Match each revenue cycle to its’ corresponding control: control over shipping and
billing documents
Match each revenue cycle to its’ corresponding control: use of authorized
credit memoranda
Match each revenue cycle to its’ corresponding control: use of chart of accounts and review of
account codings
The custodian of notes receivable should not
have access to cash or to the general accounting records.