Testing Accounts Receivable

Question 1

Which two assertions normally have the highest risk for accounts receivable?

Answer 1

1. Existence.

2. Valuation

Question 2

What audit procedures are commonly used to test the existence of a client’s accounts receivable?

Answer 2

Select a sample from the accounts receivable trial balance:

• confirm balances with customers.
• Examine sales invoice and other supporting documents.
• Examine subsequent cash receipts.

Question 3

What audit procedures are commonly used to test the completeness of a client’s accounts receivable?

Answer 3

Select a sample of November and December shipping documents:

- Trace shipments to sales journal and accounts receivable trial balance.

Question 4

What audit procedures are commonly used to test the valuation of a client’s accounts receivable?

Answer 4

Confirm balances with customers.
Trace A/R balances to sales invoices.
Test the allowance account.

Question 5

What audit procedures are commonly used to test the rights & obligations of a client’s accounts receivable?

Answer 5

Inquire about factoring or discounting of receivables.
Inquire about sales returns policies.
Search for large returns recorded during subsequent period.

Question 6

What audit procedures are commonly used to test the presentation & disclosure of a client’s accounts receivable?

Answer 6

Ensure long-term and short-term receivables are properly classified.
Ensure related party receivables are disclosed.
Ensure intercompany receivables are eliminated.

Question 7

What are three types of confirmation requests?

Answer 7

1. Positive.
2. Negative.
3. Blank

Question 8

Under what circumstances would negative confirmation requests be appropriate?

Answer 8

Only in low-risk situations when balances are small and internal controls are strong.

Question 9

Under what circumstances would blank confirmation requests be preferable.

Answer 9

When the auditor is relying on confirmations to provide strong evidence regarding the valuation of receivables.

Question 10

What alternative audit procedures should be performed when no reply is received to an account receivable confirmation request?

Answer 10

Examine sales invoices, shipping documents, and customer orders.
Examine subsequent cash receipts.

Question 11

What factors should an auditor consider when evaluating the adequacy of a client’s Allowance for Uncollectible Accounts?

Answer 11

Historical default experience.
Age of receivables.
Health of economy.
Adequacy of collateral.
Nature of the loans (commercial vs. real estate)

Question 12

What analytical procedures are commonly used to test a client’s net accounts receivable?

Answer 12

Comparing A/R turnover to prior years.
Comparing bad debt expense to write-offs.
Comparing beginning bad debt allowance to subsequent write-offs.
Calculating allowance exhaustion rate.