Chapter 9 - Receivables, Cash And Bank Flashcards
Circularisation testing
Most reliable method of testing the existence of receivables.
Obtain a list of receivables at y/e and agree total to the sales ledger control account. Review any obvious omissions eg. Old debtors. Then select a sample of clients for circularisation.
Circularisation is send a letter the the clients receivables asking them how much they owe the client. Check the responses to the account.
Must reply to the auditor to avoid tampering, any difference can be investigated (late return at y/e or genuine mistake) - not all respond as not legal obligation to do so.
Additional methods if circularisation isn’t effective:
Agree opening balances l/y to closing balances this year.
Cast receivable ledger.
Review after year end cash received and credit notes to see if anything relates to the year - existence and valuation.
Discuss potential irrecoverable debts - valuation.
Sales cut off test - completeness and existence.
Review board minutes - valuation.
Analytical review comparing 2 years balances, receivable days.
Prepayments
If material they need to be tested - select a sample and trace to the invoice, verify existence and recalculate for accuracy
Main method of testing cash and bank
Requesting a bank letter for the closing balance of the clients account. Auditor needs written permission from client so need to send to bank in advance.
This tests valuation of the bank balance in the FS
Other methods of verifying bank and cash
Cast the cash book - completeness
Recalculate the bank rec and agree and reconciling items - completeness, valuation and existence.
Drawer cheques - written cheques that are written but not in cash book - completeness.
Review correspondence to see if any new accounts opened.
Review Statements for any unusual transactions.
Petty cash
Not usually material so auditors don’t test it.
If it is then they will count it at the year end.
