Specific Audit Areas - Account Receivable

Question 1

Recall the four assertions that Professional Standards identify for account balances at the end of the period:

(1) existence;
(2) completeness;
(3) rights and obligations; and
(4) valuation and allocation.

I. Related to the Existence/Occurrence Assertion - Confirm selected individual customers’ accounts

Verify that the subsidiary A/R ledger agrees or reconciles with the A/R general ledger balance:

• accounting records constitute one category of evidence.
• second category is other information according to SAS No. 106 and is covered in the review module on Audit Evidence.
• important to establish the logical connection between the detailed accounting records being used for the audit procedure and that which is the object of the auditor’s intended conclusions (specifically, the general ledger balance for A/R).

Confirm all accounts that are determined to be individually material and confirm selected other accounts on a test basis.

1. Positive confirmations—Request a response whether the individual customer agrees or disagrees with the stated balance
2. Negative confirmations
   
   1. ​taken as evidence supporting the client’s representation.
   2. recipient of the request might have thrown it away without even verifying the balance owed.
   3. are usually used only for rather small balances under conditions of effective internal control (i.e., low control risk).

Investigate All Exceptions (Disagreements) Received - Determine whether the client’s records are accurate and, if not, whether the financial statements are materially misstated.

Note: If no response is received to a positive confirmation request, the auditor should send a second confirmation request, and perform alternate procedures if still no response is received.

Subsequent cash receipts (the preferred alternate procedure) - Trace collections on the account subsequent to the date of the confirmation to the cash receipts journal and to the bank statement (suggests the balance was valid if it was subsequently collected)

Vouch to (inspect) the underlying documents (the last resort if the account has not been collected) - Examine the documents (customer’s purchase order, client’s sales invoice, and shipping documents) supporting the validity (occurrence) of the transactions comprising the account balance.

Question 2

Related to the Valuation Assertion - Evaluate the reasonableness of management’s estimates of allowance for uncollectibles** and the **allowance for sales returns.

Note: confirmations may contribute, in part, to the auditor’s conclusions about the fairness of the dollar valuation, however, that contribution relates to establishing the reasonableness of the gross A/R and additional procedures are required to assess the net realizable value of the A/R.

Review the Client’s Aged Trial Balance of Accounts Receivable

1. Inquire about any large, delinquent items.
2. Estimate the percentage of uncollectible accounts within each category of age (based on prior year’s working papers tempered by current economic conditions).
3. Review receivers (documents used by the entity’s receiving department to capture deliveries) after year-end for sales returns; consider prior years’ returns in view of current economic conditions.
4. Review adjusting journal entries (e.g. write-offs) for appropriate authorization.

Question 3

Related to the Completeness Assertion

Perform a cutoff test of sales. Examine the shipping documents for the last few shipments before year-end and the first few shipments after year-end;

• compare these shipping documents with the related sales invoices to assess whether the sales were recorded in the appropriate period.

Proper cutoff involves two assertions (existence/occurrence and completeness).

Question 4

Related to the Rights and Obligations Assertion - Inquire of management:

1. About receivables pledged as collateral for debts (and review loan agreements to identify such collateral)

Note: Lapping is an attempt to cover up a theft of receipts, where a clerk might try to apply a later receipt to the prior customer’s account (and so on) until the scam ends by writing off someone’s account as uncollectible.

What is a Lapping?

A type of fraud (specifically, misappropriation of assets) that is associated with an improper segregation of duties whereby someone with access to the customer’s payment also has the authority to make entries in the accounting records to cover up the theft.

1. About shipments on consignment that are not actual sales
2. About any receivables due from employees or management that should be classified separately from ordinary trade receivables
3. Document such inquiries (and management’s response) in the management representations letter.