chap 10 Flashcards
possible substantive procedures for accounts receivable assertions
- initial procedures
2.Analytical procedures - test of details of transactions
4.Test of details of balances - Classification and presentation
Initial Procedures
1.trace amt of account receivable and related allowance account of current period to the closing audited balances in the previous working papers
- Review current period activity in the general ledger control acc and related allowances account for significant entries or entries that require attention
- Use of account receivable trial balance: listing of individuals customer balances at a particular date on the account receivable master file or acc receivable sub ledger
- adtr does summation of listing and compare total with subsidiary account and general ledger control account balance to ensure accuracy and completeness
- adtr should compare sample of the customer details and balances shown on the trial balances with subsidiary ledger . the sample is a physical representation of pop of acc receivables for other substantive procedures
- adtr draw up an aged trial balance of accounts: acc recvb. tb in which balances are analyzed by period since trsn was entered.
- working paper provides evidence for substantive procedures
- initial procedures provide evidence for Accur. and AVA
Analytical Procedures
- adtr will perform anal. procdrs to set expectations.
- best to perform A.PDC early in the final audit to so that test of details is responsive to any change
- first stage is to Review understanding of entity, with a focus on anticipated changes expected in sales and AR
- second stage is to Identify absolute change amounts between this year and last year. done when preparing lead schedule
5.third stage is to use sophisticated ratios using audt software. relevant ratios are gross profit and average collection period
- if actual figures deviate largely from results of ANAL.PDRS and not readily explained , then audtr seek explanation from mgt and perform more test of details
- anal. pdrs providenciéis evidence for existence or occurrence, completeness and AVA.
- EXPectation from anal pdrs will determine test of details
Tests of Details of Transactions
- when bal has too many trsn then more efficient in doing test of details of balances and tD of trsn will help corroborate the TD of bal.
2.Often performed during interim audit in the form of dual purposes in exception of cut off tests (performed at the end of the year)
- this process involves vouching a sample of acc rece. to matching supporting document, performing sales cut off, sales return cut off and cash receipt cut off.
Tests of Details of Transactions- vouching
vouching a sample of acc rece. to matching supporting document
- provide evi far AVA , EXIstence and R&O
- VOUCH A SAMPLE OF CREDIT to REMITTENCES advices and sales adjustment authorizations to provide accuracy and completeness
Tests of Details of Transactions- sales cut off
6.sales cut off test performed to provide reasonable assurance that sales and acc rble are recorded in the same period as the trsn took place and there are corresponding entries to inventory and COS in the same acc period.
- the greater the risk of overstatement, the greater emphasis on checking the occurrence of sales
- audtr compares number of last shipping doc with cut off for inventory. also compare sales occurring during end of current period with shipping doc before cutting off to evidence if they really happened before end of reporting year
- sales recorded after end of reporting period are vouched with shipping doc to check if they were not delivered before cutting of period
Tests of Details of Transactions- sales return cut off
- obtain reasonable assurance that sales returns were recorded in the same period as sales
2.ensure that acc revble and sales are not overstated
3.examine receiving reports for returning gds and correspondence from customers
4.unusual large sales return shortly after year end could suggest that unauthorised shipment before year end to overstate sales and debtors acc
Tests of Details of Transactions- cash receipt cut off
- provide reasonable assurance that cash received is recorded to the correct accounting period
- provide evidence for both debtor acc and cash
3.adtr observe that collection of cash received debited to cash in hand and credited from debtor acc.
- Can also review supporting document such as validated deposit slip and daily cash summary for the last day of
Tests of Details of Balances
- Provide evidence to existence and R& O
- does not provide evidence for completeness as customers are unlikely to admit they owe leading to the risk of unrecorded credit sales
- To compement for the test of completeness, adtr will evaluate the adequacy of the allowance for doubtful debts
Tests of Details of Balances-Confirmation
1.most efficient way of providing evidence for existence and R&O
2.ineffective when:
-response rate is determined to be inadequate or unreliable by adtr
-If customers use vouchers system which does not show only total outstanding amt owed to client
- limitations of using comfimtn:
- clients agrees to amt outstanding but doe not confirm intention to pay
-High non response rate will require adtr to perform another procedure
- audtr deal with all the confidential info, the entity should authorize the customers to provide adtr with required info. if denied access to the information based on a non reasonable explanation, adtr can form a modified opinion based on the limited audit scope
positive confirmation used
when:
- detection risk is moderate to high
- large number of small balances in the pop
- there is reason to believe a high response rate
timing and extent of confirmtn request
- if DR IS set low, confront request sent at end of reporting year, otherwise , one or two months before end of reporting year
- when 2 or 3 months before:
- adtr perform analytical procedures between date of confirmtn and end of reporting year in the receivables acc
-perform test of control during intervening period to ensure that a high DR is maintained
- acc RVBle divided into distinct pop for sampling. this is after key significant accounts are separated and confirmed directly by adtr
- Sample size determined by statical or non statistical method , also emplhasizing on random selection
- adtr should examine evidence regarding allowance estimation uncertainty up to the audit report date, send correspondance to debt agencies, customers and communicate with mgt about collectability and
Disclosure
- A review of the accounts receivable trial balance indicate amounts due from different parties that should be specifically identified if material
2.A review of the accounts receivable also show credit customers bal to be disclosed as CL
3.Adtr should obtain evidence of activities from a review of the minutes of board meetings and from inquiry of management.
