Ch 11 - A/R & Revenue Flashcards
A/R fraud/material risks, A/R analytical procedures, A/R internal controls, A/R substantive tests
A/R is _______ (material/immaterial), _______ (tangible/intangible), and _________ (objective/subjective) in nature.
Material
Intangible
Subjective
T/F: You can steal A/R.
False; You CAN’T steal A/R because it’s intangible (it’s money you will receive in the future/money that’s owed)
T/F: A/R is easy to fake/add.
True (because it’s intangible)
Cut-off issue:
Recognizing revenues/sales early
How do people commonly recognize revenue/sales early?
Dr A/R, Cr Revenue/Sales
(easy to do this)
What is something a person wouldn’t record when recognizing revs/sales early?
Dr Cash, Cr Rev/Sales
(people/auditors will become apparent quickly that the cash wasn’t actually collected)
Overstating A/R as a means to overstate/make up Revenues/Sales falls under which assertion?
Existence/occurrence
(material misstatement risk)
Accurately/inaccurately estimating the Allowance for Doubtful Accounts (A4DA) falls under which assertion?
Valuation
(material misstatement risk)
Recognizing Sales transactions early falls under which assertion?
Cut-off
(material misstatement risk)
Disclosure issues related to Pledged Receivables falls under which assertion?
Presentation/Classification
(material misstatement risk)
A/R Turnover Equation and Purpose:
AR Collections / Average AR Balance
OR
Cash Collections / Average AR Balance
(how many times the client “collects all the A/R” in a year.)
T/F: An increasing A/R Turnover is concerning
False; a DECLINING A/R turnover is concerning
A declining A/R turnover may be a sign of:
1) Collection issues (numerator will decline and the denominator will build up)
2) Inflating A/R (denominator will increase from Debiting A/R to make up/recognize early sales)
3) Theft of Cash Collections (numerator will decline)
Approving Credit Sales and Approving Voids/Reversals/write offs of amounts owed is an example of which segregation duty?
Authorization
Person could make up a sale by Debiting A/R and Crediting Cash. Then, to avoid the various ways we detect made up sales, the person could Write-off the debt as bad (Dr A4DA/Bad Debt, Cr A/R), void the debt as forgiven, or just delete the records entirely after the financial statements are issued. This is an example of mixing which 2 segregation duties?
Recording & Authorization
Person authorizing the credit sale may also alter the records to recognize the sale early, making Sales for this year look better. This is an example of mixing which 2 segregation duties?
Authorization & Recording
Person could pocket the cash from A/R collections and not book the A/R subledger or alter the A/R subledger in ways that mask the theft. This is an example of mixing which 2 segregation duties?
Custody & Recording
How do we test internal controls to ensure that segregation of duties are properly separated?
1) Inspections (inspect job descriptions, org charts, & source doc authorizations)
2) Inquiries
3) Observations
For A/R, we are primarily concerned with (what documents)?
1) Customer invoices & bills (sales transactions)
2) Shipping documents (when to recognize revenue)
Revenue Recognition (e.g., when you Debit A/R and Credit Sales) is based upon when…
Either 1) a service is performed or 2) legal ownership changes
T/F: Legal ownership typically changes when a good is shipped
True (stresses importance of segregated duties to avoid forging/altering in order to maintain a reliable Audit Trail)
Legal ownership changes as soon as the goods are shipped is ___________
FOB (freight on board) Shipping Point
Legal ownership changes when a good reaches its final destination is _______
FOB Destination
(have to wait longer to recognize revenue)
How do we test internal controls to ensure that audit trails regarding revenue recognition are reliable?
1) Inspections (read computer system documentation)
2) Inquiries (ask CFO/Controller/IT professionals about the restrictions in the various computer systems & ask warehouse personnel where documents are and how they are secured)
3) Observations (watch warehouse workers to see how the docs are accessed/used)
The client should be predicting A/R collections and comparing the predictions to actuals on a ______ (daily/weekly/monthly/ yearly) basis.
Monthly
How do we test internal controls to ensure that A/R predictions and actuals are accurate?
1) Inspections (obtain and read the comparison documents)
2) Inquiries (ask the Controller &/or A/R Clerk about the comparisons)
3 types of approval for credit sales:
1) Credit score minimums (i.e. larger credit sales will have higher credits score requirements)
2) Cash down payments
3) Supervisor approval
Lending money to non-creditworthy customers _____ (increases/decreases) the A4DA.
Increases (which increases risk of material misstatements)
How do we test internal controls to ensure that customer approval for credit sales is accurate?
1) Inspections (review proper approval, down payments and credit check information docs)
2) Inquiries (ask sales team/supervisors about approval processes)
3) Observations (shadow sales team/supervisor)
T/F: The client must mail customers with A/R balances statements on a monthly basis.
True; if the balances don’t look correct, the customer will call in a complaint because their statement doesn’t reflect the payment
How do we test internal controls to ensure that the client is mailing monthly statements to the customer?
1) Inspections (review a sample of customer statement copies)
2) Inquiries (discuss the statement production process with Controller / A/R Clerk)
3) Observations (shadow A/R Clerk(s) as they prepare/mail customer statements)
A report that lists customers in the A/R subledger and how much of their A/R is past due. The past due amounts are bucketed into time frames, usually 1-2 weeks, 3-4 weeks, etc.
Receivables Aging Report
T/F: Clients will have internal policies for when a past due A/R need to be written off.
True; i.e. after 90 days, it should be written off
If the Aged Receivables shows more customers going delinquent for longer periods of time, that’s good reason to suspect the A4DA needs to ______ (increase/decrease)
increase
How do we test internal controls to ensure that Age Receivables Report is accurate?
1) Inspections (review the report)
2) Inquiries (discuss the creation of the report with Controller and A/R Clerk)
3) Reperformance (recreate the report and compare with the client)
T/F: Auditors typically perform substantive tests over A/R if the transaction is large or unusual.
True; these are the riskiest transactions
(focus on Debits to A/R)
We perform these substantive tests over A/R through…
1) Vouching the amounts to the source docs
2) Inquiring about these transactions through the CFO, Controller, AR Clerk
T/F: A/R cannot be pledged as collateral in a loan/contract.
False; A/R CAN be pledged as collateral
Pledged A/R is the property of the ____ (client/loan provider)
Client
T/F: the pledge must be disclosed in the financial statements.
True
How do we test internal controls to ensure that Pledged (collateral) Receivables are disclosed/presented correctly?
1) Inspections (read debt contracts/loans for collateral terms)
2) Inquiries (talk to Controller and CFO about pledged receivables)
What assertion is tested for pledged receivables?
Presentation/Classification (AKA Disclosure) – management is asserting that they have fully described any pledged receivables in the footnotes.
What assertion is tested for testing receivables aging?
Valuation (helps us identify if the A4DA is adequate)
Existence/Occurrence (vouching tests that they actually exist when tying amounts)
How to test that the A4DA and aging receivables amounts are adequate under the valuation assertion? (5 steps)
- look at age receivables report from client
- If any receivables are past the write-off deadline for the client they need to be written off immediately
- Foot & Cross-foot it (totals tied to TB and A/R subledger)
- sample specific customer accounts and vouch to source docs
- Total/amount of past due receivables is used in the subjective assessment of whether the A4DA is sufficient
How to test for verifying the net/reported value of A/R on the financials is accurate?
1) Have the client walk you through their calculation and make an evaluation of the reasonableness of the process (common & easy)
2) Come up with your own estimate and compare the final # to the client’s # (uncommon & hard)
3) Compare the estimate to actual customer defaults after the fiscal year end (Not possible for A/R with very long payment terms)
T/F: A/R is abstract
True
Management is asserting that all the Sales / A/R transactions recorded in this period belong in this period.
Cut-Off assertion
For cut-off testing for Early Recognition related to A/R we:
1) Vouch transactions just before the fiscal year end
(VB - volleyball & vouch before)
2) Trace transactions just after the fiscal year end
(TA- teaching assistant & trace after)
Financial statement items tested for cut-off testing for Early Recognition related to A/R:
1) A/R Subledger (for when the A/R / Sale was recognized)
2) Sales/Revenue account (for when the A/R / Sale was recognized)
Source documents tested for cut-off testing for Early Recognition related to A/R:
1) Customer Invoices (for when the A/R / Sale was earned)
2) Shipping Documents (for when the A/R / Sale was earned)
Letters to customers with A/R balances asking them to verify/confirm their balance for us
Confirmation letters
T/F: A/R Confirmation Letters are required by the standards for material A/R
True (not required for immaterial A/R)
What assertions are tested for confirmation letters?
1) Existence - A response from the customer is evidence that the A/R is real/exists.
2) Valuation - The customer will give us info on whether the A/R $ amount is correct.
A/R confirmation letters are in __________ (paper/email or electronic service)
in paper/email form
This letter requests a response whether the amount is correct of incorrect; If the customer does not response, the account is not considered confirmed
Positive Confirmation Letter
This letter requests a response only if the amount is incorrect: If a response is not received, the account is assumed to be confirmed.
Negative Confirmation Letter
Which type of confirmation letter is more reliable?
Positive Confirmation Letters
T/F: Negative Confirmations are the default required by the standards.
False; Positive confirmation letters are the default
A means of hiding cash embezzlement/theft by misapplying subsequent customer collections.
Lapping (never-ending series of overlapping customer payments)
What assertion is tested when testing for lapping?
Existence (Management is asserting the A/R is not overstated. That is, all the A/R are still reported at original value even though many of them will not actually be collected by the company (because they were stolen)).
Testing write-offs when testing for lapping:
1) Select a sample of write-offs during the period
2) Vouch the write-off to Invoices / A/R terms to assure it is past due long enough to be written off
3) Search for payments from those customers in Check records and the Cash Control Listing to assure payment was never made
Tying (what to what) when testing for lapping:
1) Names/dates on Customer Checks to Credits in the A/R subledger
2) Names/dates on the Cash Control Listing to Credits in the A/R subledger
