AP-3: Audit Program for Accounts Receivable

Company Balance Sheet Date

The company has the following general ledger accounts that are classified in the accounts, notes, or other receivables captions of the balance sheet: General Ledger Number

Description or Brief urpose of the !ccount

Current or Noncurrent !sset"

!udit #b$ectives !udit rocedures for Consideration *(N!NC(!L +T!T,-,NT !++,.T(#N+

,%# C .%# ,)istence or occurrence/ Completeness/ .ights and obligations/ 0%! %D 0aluation or allocation/ resentation and disclosure/

N%! &or'paper erformed (nde) by

!1D(T #B2,CT(0,+ !/ !ccounts receivable are authentic obligations owed to the company at the balance sheet date 3assertions ,%#, .%#, and 0%!4/

B/ !ccounts receivable include all amounts owed to the company at the balance sheet date 3assertion C4/ C/ The allowance for doubtful accounts is ade5uate but not e)cessive/ (f the direct write6off method is used, all significant doubtful accounts have been written off, and the bad debt e)posure in the remaining accounts is insignificant 3assertions 0%! and %D4/ D/ ledged, discounted, or assigned accounts receivable are properly disclosed/ .elated party receivables are properly disclosed 3assertions .%# and %D4/ ,/ !ccounts receivable are appropriately classified in the balance sheet, and re5uired disclosures are made 3assertion %D4/ (D,NT(*(C!T(#N C#D,+ The letters preceding each of the above audit ob$ectives, i/e/, !, B, etc/, serve as identification codes/ These codes are presented in the left column labeled 7!udit #b$ectives8 when a procedure accomplishes an ob$ective/ (f the alpha code appears in a brac'et, e/g/, 9!:, 9B:, etc/, the audit procedure only secondarily accomplishes the ob$ective/ (f an asteris' precedes a procedure, it is a preliminary step or a follow up step that does not accomplish an ob$ective/ B!+(C .#C,D1.,+ ; </ #btain or prepare an aged trial balance of accounts receivable/ a/ (f the trial balance is prepared by the client, test the clerical accuracy/ Do not test the accuracy of the aging of individual accounts until you start +tep =/ b/ Briefly in5uire of management as to steps ta'en to ensure the trial balance is complete, i/e/, that all receivables due the company are included on the trial balance/ 3+ee also +tep <>/4 c/ .econcile the balance to the general ledger account balance/ ractical Considerations:

 -eet with the client before the balance sheet date and arrange for a duplicate copy of the trial balance for your wor'papers/ (f the aged trial balance is computer generated, consider using computer audit software 3such as (D,!tor !CLt4 to test the mechanical accuracy/ (f the client uses pac'aged accounting software and the auditor has determined that the client is unable to ma'e changes to program coding, testing the mechanical accuracy of the accounts receivable trial balance may not be necessary/ (f procedures are performed to test mechanical accuracy in this situation, they may be limited/ (f the listing is manually prepared, instruct the client to identify each customer and account number on the aging and to leave ade5uate space to record subse5uent collections/ +tress the importance of clarity and neatness in preparing the schedule as it will be the primary wor'sheet/ 1tili?e client employees whenever possible to reduce the time re5uired to test clerical accuracy/ *or e)ample, for long reports, remove several pages and have the client foot the remaining pages, then add your page totals/ !lso, avoid footing all the columns on the trial balance/ (nstead, foot two columns and crossfoot the total line/ ; @/ .eview the aged trial balance to determine if there are natural groups within the total population of accounts/ +ee paragraphs A></B and A></<> for guidance/ ractical Considerations: (dentifying groups within the accounts receivable population can lead to more efficient testing of accounts/ The following groups normally e)ist in the population: 31se CC6=a to assist you/4 Customers with individually significant account balances or one customer with numerous small account balances that, when totaled, are significant/ +ee paragraph A></A for guidance on determining an individually significant amount/

 !ccounts with unusual characteristics other than the dollar amount of the balance/ +uch characteristics might include significant past due balances, an unusual customer name, accounts prone to misstatement, etc/ !ccounts with credit balances/ .elated party accounts/ !ll other accounts/

The groups do not need to be documented or listed in a separate schedule/ Tic'mar's can be used to identify accounts within a group, or you can simply have a mental awareness of each individual group/ Groups may also be identified by simply scanning the trial balance/ !, ,, 9B:, 9C: D/ +elect those groups that will be confirmed <>>E by the use of positive confirmation letters/ 3Do not confirm accounts until the subsidiary ledger has been reconciled to the general ledger/ +ee +tep </4 a/ (dentify the accounts selected on the aged trial balance/

b/ .eview those accounts selected for confirmation with the owner%manager/ (f the client ob$ects to a confirmation with a particular customer, determine if this restriction will affect your ability to accomplish the audit ob$ectives for receivables/ c/ Fave the client prepare the positive confirmation letters reflecting, if possible, on the face of the letter or in an attached statement, the individual invoice number, invoice date, and invoice amounts that ma'e up the customerGs balance/ d/ (nclude the audit firmGs return address on all envelopes to ensure that all confirmation re5uests that are undeliverable by the post office are returned directly to the audit firm/ e/ Be sure that the confirmations are to be returned directly to the auditor and contain a return envelope for this purpose/

f/

Control the mailing of the letters/

g/ +end second re5uests appro)imately <> days after the first mailing/ Determine the cause for confirmation re5uests returned as undeliverable/ (f possible, obtain new addresses and remail/ h/ .etain copies of all confirmations in the wor'papers/

ractical Considerations: +!+ No/ HI, !udit Documentation, re5uires documentation of substantive tests of details involving inspection of documents or confirmation to include identification of the items tested/ The authors believe items tested can be identified by listing the itemsJ by including a detail schedule in the wor'papers, such as an aged trial balance, on which the items are identifiedJ or by documenting in the wor'papers the source and selection criteria/ *or e)ample: *or tests of significant items, documentation may describe the auditorGs scope and the source of the items 3for e)ample, all account balances greater than KB,>>> from the <@%D<%C@ accounts receivable detail4/ *or hapha?ard or random samples, documentation should include the identifying characteristics of the items 3for e)ample, the specific invoice numbers, customer account numbers, etc/4/ *or systematic samples, documentation may indicate the source, starting point, and sampling interval 3for e)ample, a selection of accounts from the <@%D<%C@ accounts receivable detail, starting with account number @<B> and selecting every <>th account thereafter4/ +!+ No/ HI is effective for audits of financial statements for periods beginning on or after -ay <B, @>>@, with early application permitted/ There is a presumption auditors will confirm accounts receivable/ (f accounts receivable are not confirmed, +!+ No/ I= re5uires auditors to document how they overcame that presumption/ -any auditors assign a numerical or alpha code to each

customer selected for confirmation and record this code by the account on the aged trial balance and on the confirmation letter, for e)ample, confirmation <, @, D, etc/ This ma'es chec'6in of replies easier/ The auditor should obtain photocopies of positive confirmation letters and any attached statements for sending second re5uests and documenting performance of alternative procedures for nonreplies/ The 7Confirmation and Correspondence Control8 at CC6@A can be used to monitor the status of confirmations/ (t may be helpful to record a client code on the return envelope to facilitate routing of the reply to the appropriate client mail file in the auditorGs office/ This may be especially helpful during pea' periods when the firm has several audits in progress/ +ome customers may have different billing vs/ shipping addresses/ (n5uire if the proper address is used/ The wording of the re5uest should be clear and simple/ ! deadline date can also enhance the response time/ +ee the sample accounts receivable confirmation letters at CL6= through CL6<</ !lso, see paragraph =>D/A for other suggestions for improving confirmation responses/ (f possible, client personnel should prepare the letters/ (f there are numerous letters, a word processing mail merge can be used to insert the mailing address, salutation, and account balance into the form letter/ The auditor should mail the letters or accompany the letters to the post office or mail drop/ *irst class mail should be used to facilitate response time/ +pecial handling procedures should be considered for international mail, for e)ample, both a tele) re5uest and a confirmation letter may be appropriate/ !lso, including one or two international reply coupons 3purchased at the post office4 with confirmations may increase the response rate/ Customers can use the coupons to purchase stamps in their own currency/ (f the auditor, based on his or her consideration of fraud ris'

factors, decides to modify procedures related to accounts receivable balances, the auditor should consider contacting customers by telephone in addition to sending written confirmations/ (n addition, the auditor may consider confirming additional information with the customer/ *or e)ample, relevant contract terms such as acceptance criteria, delivery and payment terms, the absence of future or continuing client obligations, the right to return product, guaranteed resale amounts, and cancellation and refund provisions may also be confirmed/ The auditor should also consider confirming that the client and customer do not have any side agreements in addition to stated contract terms/ !ccounts receivable often represents one of the best opportunities to use data e)traction software in an audit/ Both the auditor and the client may save significant time by automating the accounts receivable confirmation process/ Data e)traction software also can be used to divide the population of accounts into natural groups 3see +tep @4, review subse5uent cash collections and test the accounts receivable aging 3see +tep =4, and test sales cutoff 3see +tep <<4/ !, ,, 9B:, 9C: A/ *or the remaining balance that is not confirmed <>>E in +tep D, determine if a sample of the accounts ma'ing up the balance should be selected for confirmation/ a/ (f sampling is appropriate, document the sampling selection process/ b/ .epeat program +teps Da through Dh on accounts being sampled/ ractical Considerations: .eview Chapters A and = before performing a sampling application and determining a sample si?e/ (n many situations, sampling the remaining balance may not be necessary/ +ee CC6=a for a wor'sheet to determine the e)tent of procedures to apply to the remaining balance/ (f sampling is used, consider confirming invoices instead of account balances/ The 7+ampling lanning and ,valuation *ormL+ubstantive

Tests,8 3CC6=b4 can be used to document the sampling process/ !, ,, 9B:, 9C: B/ *or significant employee receivables, notes receivable, or other receivables not on the aged trial balance, consider mailing positive confirmations/ .etain copies of all confirmations in the wor'papers/ ractical Consideration: Normally these receivables are not material, and audit procedures are not warranted/ (f the owner%manager has a large payable to the company, the auditor should evaluate whether the receivable actually represents salary or a dividend/ Confirmation of a loan to an owner%manager can also be obtained in the management representation letter if the owner%manager is the party signing the representation letter/ I/ !, ,, 9B:, 9C: rocess the confirmation replies:

a/ .econcile differences reported by customers on confirmation replies/ ractical Considerations: (n most instances, it is efficient to have the clientGs personnel perform the initial reconciliation of the confirmation replies/ (n that case, a copy of the confirmation reply should be provided to the client with instructions on the format they should use to reconcile the customerGs balance to the clientGs balance/ 3+ee CC6@< for a suggested wor'paper format that may be used/4 (f practical, client personnel should be re5uested to attach supporting documentation, such as validated deposit slips, invoices, and shipping documentation, to each reconciliation to facilitate e)amination by the auditor/ .espondents sometimes use nontraditional means such as fa) machines or e6mail to answer confirmation re5uests/ (n those cases, the auditor should consider the following additional steps: 0erifying the source and content of the response over the telephone and documenting in the wor'papers that this was done/ .e5uesting that the respondent mail the original confirmation directly to the auditor/

b/ erform alternative procedures for those customers that do not respond/ ractical Considerations: Generally, the following approach can be used to perform alternative procedures for each nonreply: *irst, e)amine cash receipts subse5uent to the confirmation date/ (f a portion of the balance has not been collected, e)amine sales invoices and corresponding shipping documents/ The auditor may also e)amine shipping documents on the subse5uently collected portion if additional evidence about sales cutoff is needed/ (f practical, alternative procedures should be performed on all nonreplies/ Fowever, if a nonreply will be e)tremely time6 consuming to test, consider classifying the entire nonreply customer balance as a misstatement/ (n that case, if the nonreply was part of a sampling application, the misstatement should be pro$ected to the population 3see +tep Id4/ Then, if the resulting pro$ected misstatement in the total account is acceptable, additional testing is not necessary/ c/ *or groups confirmed <>>E, summari?e the results of confirmation procedures and indicate the total accounts and balances confirmed without e)ception, confirmations reconciled, nonreplies with alternative procedures performed, and confirmations and nonreplies with misstatements/ d/ *or accounts receivable groups that were sampled, summari?e and evaluate the sample results and pro$ect the misstatements in the strata/ e/ Based on results of confirmation procedures, determine if additional confirmation or alternative procedures are warranted on untested customer balances/ ractical Considerations: The 7Confirmation +ummary *orm8 3CC6M4 can be used to

summari?e the confirmation results for sampling or nonsampling applications/ The 7+ampling lanning and ,valuation *ormL+ubstantive Tests8 3CC6=b4 can be used to summari?e, as well as evaluate, the results for sampling applications/ C =/ Test the ade5uacy of the allowance for doubtful accounts:

a/ Fave the client post subse5uent cash collections to your copy of the aged trial balance obtained in +tep </ b/ Test the clientGs subse5uent collections on ma$or account balances by e)amining deposit slips and remittance advices/ Document the account balances selected for testing/ c/ (f uncollected accounts are significant, test the aging of the remaining accounts/ 3(t is advisable to use original sales documents to test the propriety of aging/4 d/ (f practical, for each material past due account, inspect credit files, review customer correspondence, or discuss the status of collection with the client/ (dentify potentially doubtful accounts/ e/ (n5uire if there are collection problems li'ely to occur with accounts that are presently classified as current/ f/ (f you become aware that individual accounts have been converted to notes, determine if they should be classified as noncurrent assets/ g/ .elate your findings in +teps =a to =f to the allowance for doubtful accounts and evaluate its ade5uacy/ (f meaningful, consider computing prior year bad debt statistics and prior year collection statistics/ h/ (f the company uses the direct write6off method, evaluate the e)posure that significant uncollectible accounts remain in accounts receivable/ ractical Consideration:

 The direct write6off method is not G!! / Fowever, depending on the materiality of the allowance and write6offs during the period, it may appro)imate G!! / i/ Consider the collectibility of significant employee receivables, notes receivable, or other receivables not on the aged trial balance/ ractical Considerations: Comments made by client personnel should not be ta'en at face value without other evidence to support the accuracy of client comments/ #ther considerations or approaches that you may wish to use are: 1se alternative approaches to develop an independent estimate/ Compare the allowance with actual results after the balance sheet date/ Consider the clientGs process for estimating the allowance, including the 5ualifications and e)perience of the person who determines the amount of the allowance account/ Determine whether the estimate of the allowance balance was sub$ected to management review/ Determine what steps the company ta'es to identify any unusual variations and the reasons therefor/ +tatistics regarding bad debt history may be meaningful and can be maintained on a form similar to the 7!ccounts .eceivable +tatistics *orm,8 CC6H/ (n evaluating the allowance for doubtful accounts, it may be helpful to determine a range of amounts within which the companyGs bad debt allowance would be acceptable/ (f the companyGs balance does not fall in this acceptable range, the potential error would be the difference between the clientGs amount

and the closest amount in the acceptable range/ *or significant delin5uent balances, it may be necessary to evaluate the creditworthiness of the debtor and the value of any collateral pledged to secure payment of the receivable/ D, 9!: M/ Based on a review of confirmation replies from financial institutions, loan agreements, minutes, in5uiry with the owner%manager, and wor' performed in other audit areas, determine if there are pledged, discounted, or assigned receivables/ ractical Considerations: (f the above procedures do not indicate the e)istence of such receivables, consider documenting this by stating 7none noted8 under the inde) column of this program/ (f e)istence of such receivables was noted, briefly summari?e the financial statement disclosure in a memo or cross6reference to other audit wor'papers where such information is summari?ed/ D, , H/ Based on wor' performed in previous steps and 'nowledge obtained in other audit areas, determine that the following accounts are identified for separate classification in the balance sheet/ a/ Large credit balances that should be classified as accounts payable/ b/ c/ d/ e/ B .elated party receivables/ -aterial employee receivables/ -aterial notes receivable/ Noncurrent receivables that should be reclassified/

<>/ ,valuate whether evidence obtained in the preceding steps and from procedures in the audit of revenue is ade5uate to support the completeness assertion, i/e/, whether all transactions are included in revenue and related accounts receivable balances/ ractical Considerations:

 The procedures do not have to be comple) or time6consuming/ ,vidence about completeness can be obtained by in5uiry, observation, analytical procedures, tests of transactions, and managementGs representations/ +ee Chapters D and = for additional discussion of these procedures/ The documentation of this step can be a brief memo or note in the wor'papers/ (t should correlate the wor' performed in other areas such as analytical predictive tests in the revenue area/ !, 9B: <</ erform the following analytical procedures/ *or any significant differences noted, investigate the nature and cause of the differences and consider whether additional procedures are needed to test sales cutoff: a/ Compare sales for the last month of the fiscal year to sales for the rest of the year and the first month after year end/ b/ Compare monthly sales returns and credit memos for the last few months of the fiscal year to the first few months following year end/ ractical Considerations: Basic accounts receivable confirmation procedures and the preceding analytical procedures are usually ade5uate to test the sales cutoff/ Fowever, the following circumstances warrant consideration of performing additional cutoff tests: &hen accounts receivable are confirmed as of an interim date/ &hen large 5uantities of merchandise awaiting shipment are noted during the year6end inventory observation/ &hen there has been a large increase in sales during the last month of the year under audit or in the first month of the new year/ &hen there has been a large increase in sales returns or credit memos in the first few months after year end/ &hen the auditorGs 'nowledge of the client and%or

understanding of internal control indicates a high ris' of material misstatement of sales cutoff/ &hen an analytical procedure is used as the principal substantive test of a significant financial statement assertion, +!+ No/ BI, !nalytical rocedures, as amended by +!+ No/ HI, !udit Documentation, re5uires the auditor to document 3<4 the e)pectation and the factors considered in its development 3unless readily determinable from the wor' performed4, 3@4 the results of the comparison between the e)pectation and recorded amounts, and 3D4 any additional procedures performed in response to significant une)pected differences and the results of those procedures/ +!+ No/ HI is effective for audits of financial statements for periods beginning on or after -ay <B, @>>@, with early application permitted/ ; <@/ Consider the need to apply one or more additional procedures/ The decision to apply additional procedures should be based on a consideration of whether information obtained or misstatements detected by performing substantive tests or from other sources during the audit alter your $udgment about the need to obtain a further understanding of control activities, the assessed level of ris' of material misstatements 3whether caused by error or fraud4, and on an evaluation of whether the basic procedures have been sufficient to achieve the audit ob$ectives/ !ttach audit program sheets to document additional procedures/ ractical Considerations: Certain common additional procedures relating to the following topics are illustrated following this program: Near6end cutoff/ &rite6offs/ (mputed interest/ (nterest on notes receivable/ .elated party receivables/ ,mployee travel advances/

!nalytical procedures/ *air value disclosures/ Noncurrent notes and accounts receivable/ Collaterali?ed accounts receivable/ !ccounts receivable confirmed at interim date/ Transfers of receivables/ Cash receipts/

ractitioners may refer to CGs Guide to *raud (nvestigations for more e)tensive fraud detection procedures if it is suspected that the financial statements are materially misstated due to fraud/ ; <D/ Consider whether procedures performed are ade5uate to respond to identified fraud ris' factors/ (f fraud ris' factors or other conditions are identified that re5uire an additional audit response, consider those ris' factors or conditions and the auditorGs response in connection with the performance of +tep << in ! 6<b/ ractical Consideration: +pecific responses to identified fraud ris' factors are addressed in individual audit programs/ (n connection with evaluation and other completion procedures in ! 6<b, the auditor considers the need to perform additional procedures based on the results of procedures performed in the individual audit programs and the cumulative 'nowledge gained from performing those procedures/ ; <A/ Consider whether the results of audit procedures indicate reportable conditions in internal control and, if so, add to the memo of points for the communication of reportable conditions/ 3+ee section <B>A for e)amples of reportable conditions, and see CC6<M for a wor'sheet that can be used to document the points as they are encountered during the audit/4 C#NCL1+(#N &e have performed procedures sufficient to achieve the audit ob$ectives for accounts receivable, and the results of these procedures are ade5uately documented in the accompanying

wor'papers/ 3(f you are unable to conclude on any ob$ective, prepare a memo documenting your reason/4

Additional Audit Procedures for Accounts Receivable

(nstructions: !dditional procedures will occasionally be necessary on some small business engagements/ The following listing, although not all6inclusive, represents common additional procedures and their related ob$ectives/

Near6end Cutoff !, 9B: Test the year6end cutoff procedures for sales to determine if receivables are recorded in the appropriate period/ a/ +can the sales $ournals for one month before and after year end/ (nvestigate any unusual entries/ b/ .eview the $ournal for sales returns and credit memos for two months before and after year end/ (nvestigate any unusual entries/ c/ Trace the shipping documents for the last five shipments of the year and the first five shipments after year end to the sales $ournal to determine whether they were recorded in the proper period/ ractical Considerations: Normally, the shipping documents will have already been identified at the year6end inventory observation/ 3+ee basic procedure Ia at ! 6B/4

 Basic accounts receivable confirmation procedures and the preceding analytical procedures are usually ade5uate to test the sales cutoff/ Fowever, the following circumstances warrant consideration of performing additional cutoff tests: &hen accounts receivable are confirmed as of an interim date/ &hen large 5uantities of merchandise awaiting shipment are noted during the year6end inventory observation/ &hen there has been a large increase in sales during the last month of the year under audit or in the first month of the new year/ &hen there has been a large increase in sales returns or credit memos in the first few months after year end/ &hen the auditorGs 'nowledge of the client and%or understanding of internal control indicates a high ris' of material misstatement of sales cutoff/

&rite6offs C +elect individual accounts that were written off during the audit period/ Determine that the entries were properly approved by the owner%manager/ Document the items tested/ ractical Consideration: This is a fraud test and should not be performed unless the auditor suspects that improprieties have occurred/

(mputed (nterest !, , .eview accounts and notes receivable to determine if any interest should be imputed for significant balances that are due in e)cess of one year from the balance sheet date/ !lso consider proper balance sheet classification of such receivables/ ractical Consideration:

 ,)tended term accounts receivable are rare but can arise when a company establishes payment terms for its trade accounts receivable based on a poor economy or difficulty with some 'ey customers/ Normally, this type of interest should not be accrued, but instead be recogni?ed on a cash basis/

(nterest on Notes .eceivable !, , *or significant notes receivable, test the reasonableness of interest earned and any prepaid or accrued interest receivable/

.elated arty .eceivables D, 9!: (f related party receivables are material, prepare or obtain an analysis of advances to directors, officers, employees, stoc'holders, and other affiliated parties and perform the following steps: a/ .ecompute the total balance and determine that it agrees with the balance in the general ledger or the detailed trial balance/ b/ .eview the list for potential problem accounts or large amounts/ c/ (dentify the purpose for advances and their potential collectibility/ Determine if such advances should be reflected as dividends or salary/ d/ (f the balances are significant, consider confirmation of several selected individual balances with the employees or affiliated parties and reconcile replies/ .etain copies of all confirmations in the wor'papers/ e/ Determine that such advances have been properly approved by individuals appropriate under the bylaws of the company/ f/ Determine the nature of any accounts receivable from such parties that were written off during the audit period but subse5uently reinstated to the general ledger/ ractical Consideration:

 These steps should be coordinated with the related party procedures in the general program/

,mployee Travel !dvances !, 9D: #btain or prepare a schedule of the detailed balances included in employee travel advances and perform the following steps: a/ .ecalculate the schedule to determine the clerical accuracy and determine that the total balance agrees with the general ledger/ b/ Compare individual information with the source records on a test basis/ Document the items tested/ c/ Confirm account balances with individual employees if the total amount is significant 3this is very rarely the case4 and reconcile replies/ .etain copies of all confirmations in the wor'papers/ d/ Determine whether there is a proper cutoff of e)pense advances with the last payroll for year end/ ractical Consideration: (n most cases, small businesses do not generate a significant amount of employee advances/ These advances should normally be cleared on a regular basis and, thus, should not grow to significant amounts/

!nalytical rocedures 9!:,9B:, 9C: !pply analytical procedures to accounts receivable by determining the following and comparing to percentages maintained in the permanent audit file: a/ Trade receivables divided by current assets/ b/ c/ Trade receivables divided by total assets/ Trade receivables divided by net worth/

d/ e/

Net sales divided by trade receivables/ Trade receivables divided by 3net sales divided by DI>4/

f/ Determine the cause of any significant fluctuations in these percentages/ ractical Consideration: Normally, these analytical procedures should only be performed when the auditor feels additional evidence is necessary beyond that obtained by basic procedures identified earlier in the program/

*air 0alue Disclosures , #btain information about the fair values of financial instruments 3e/g/, trade accounts receivable and notes receivable4 for disclosure in the financial statements/ ractical Considerations: +*!+ No/ <@I, ,)emption from Certain .e5uired Disclosures about *inancial (nstruments for Certain Nonpublic ,ntities: !n !mendment of +*!+ No/ <>=, ma'es +*!+ No/ <>=Gs disclosures about the fair value of financial instruments optional for companies that meet the following criteria: The company is a nonpublic company/ The companyGs total assets are less than K<>> million on the date of the financial statements/ The company has no instrument that, in whole or in part, is accounted for as a derivative instrument under +*!+ No/ <DD during the reporting period/ 1nless the client provides e)tended repayment terms 3e/g/, in e)cess of H> days4, the carrying amount of accounts receivable will ordinarily appro)imate their fair value and no disclosure is re5uired by +*!+ No/ <>=/ The carrying amount of notes receivable will ordinarily appro)imate fair value/ Fowever, if the interest rate on the note is significantly more or less than current mar'et rates, fair value can

be determined by discounting future cash flows at an appropriate rate, considering the relative ris' associated with the note/ +*!+ No/ <>= indicates that one option is for the company to use the rate at which the same loan would be made under current conditions/ *air value may be affected by the ris' that the customer or borrower will default/ (f the ris' of default is remote, it is generally possible to value the receivable by discounting future cash flows/ (f the ris' of default is probable, fair value can be determined by valuing the collateral and any secondary sources of repayment 3such as payments made by the business owner4/ Fowever, if the ris' of default falls somewhere between remote and probable, fair value estimates will re5uire significant $udgment/ (nterpretation No/ < of +!+ No/ B=, !uditing !ccounting ,stimates 3!1 HDA@4, addresses auditing the clientGs fair value estimates for disclosures re5uired by +*!+ No/ <>=/ The (nterpretation re5uires that the auditor obtain sufficient competent evidence to provide reasonable assurance that: 0aluation principles are in accordance with +*!+ No/ <>=, consistently applied, and supported by underlying documentation/ The method of estimation and significant assumptions used are properly disclosed/ aragraph I> of +*!+ No/ <>= allows companies to use simplified assumptions to estimate fair value of financial instruments/ Conse5uently, it is important that the methods and significant assumptions used in the estimates are disclosed/ (f a fair value estimate is based on the wor' of an outside specialist 3e/g/, an appraiser4, the re5uirements of +!+ No/ =D, 1sing the &or' of a +pecialist, should be followed/ The additional procedures to ! 6< contain audit procedures regarding using the wor' of a specialist/ !1 HDA@ provides additional guidance for situations in which the client chooses to provide voluntary fair value information in addition to that re5uired by +*!+ No/ <>=/ +*!+ No/ <>= does not re5uire that fair values of financial instruments be estimated if it is not practicable, or cost effective, to develop the estimates/ The decision of whether it is practicable

should consider such things as the importance of the financial instrument to the clientGs business activities and the materiality of the carrying amount of the financial instrument to the financial statements/ &hen it is not practicable to estimate the fair value of a financial instrument, disclosure must be made of: (nformation pertinent to estimating the fair value of the financial instrument/ The reasons why it is not practicable to estimate fair value/

Noncurrent Notes and !ccounts .eceivable *or notes and accounts receivable with maturities greater than one year, perform the following procedures: a/ ,valuate whether the interest and contractual principal payments will be collected in accordance with their contractual terms/ b/ (f either interest or principal payments will not be collected in accordance with their contractual terms, determine whether an allowance for credit loss has been computed using one of the following methods: 3<4 The present value of e)pected future cash flows discounted at the receivableGs effective interest rate/ 3@4 The receivableGs observable mar'et price/

3D4 The fair value of the collateral 3if the receivable is collateral dependent4/

Collaterali?ed !ccounts .eceivable C (f collaterali?ed accounts receivable are significant, e)amine collateral for e)istence, ownership, and its fair value/ ractical Considerations:

 +ome evidence of ownership includes a bill of sale, a title, a deed, or a mortgage/ Depending on the type of collateral being evaluated, the auditor may evaluate the reasonableness of the clientGs estimate of the fair value of the collateral by using a security or commodity 5uotation, appraisal, assayerGs or other e)pertGs report, blue boo', or other general source/

!ccounts .eceivable Confirmed at (nterim Date !, 9B:, 9C: (f accounts receivable were confirmed at an interim date, perform the following steps: a/ #btain a detailed aged accounts receivable trial balance at the balance sheet date and perform the following: 3<4 #btain or prepare a reconciliation of the trial balance to the general ledger control account/ ,)amine support for significant reconciling items/ 3@4 Compare trial balance totals between the balance sheet date and the interim date/ (nvestigate significant variations/ 3D4 (dentify any significant changes in the aging of accounts receivable/ b/ +can receivables activity in the accounting records during the period from the interim date to the balance sheet date/ (nvestigate and e)plain the nature and origin of any unusual entries/ c/ erform a test of sales cutoff at the balance sheet date/ ractical Considerations: (n most small businesses, it is more efficient to confirm accounts receivable as of the balance sheet date to avoid incurring the additional time necessary to bring the accounts receivable balances forward to year end/ +ection @>= discusses factors to consider when deciding whether to confirm accounts receivable as of an interim date/ (f the results of the rollforward procedures are unsatisfactory,

consider the need to confirm accounts receivable as of the balance sheet date/

Transfers of .eceivables D, , (f the company has transferred receivables to a third party, determine whether the transaction has been accounted for in accordance with +*!+ No/ <A>/ ractical Considerations: +ection D>@ of CGs Guide to reparing *inancial +tatements discusses accounting for transfers of receivables in accordance with +*!+ No/ <A>, !ccounting for Transfers and +ervicing of *inancial !ssets and ,)tinguishments of Liabilities/ !n auditing interpretation of +!+ No/ =D 3!1 DDI4, 1sing the &or' of a +pecialist, titled The 1se of Legal (nterpretations as ,vidential -atter to +upport -anagementGs !ssertion That a Transfer of *inancial !ssets Fas -et the (solation Criterion in aragraph H3a4 of *inancial !ccounting +tandards Board +tatement No/ <A>, provides guidance to auditors about obtaining evidential matter to determine the proper accounting treatment under +*!+ No/ <A>/

Cash .eceipts ; (f the auditor, based on his or her consideration of fraud ris' factors, decides to modify procedures related to customer cash receipts, consider performing a proof of cash 3see additional procedures at ! 6@4/ (n addition, consider verifying the following: a/ The dates of cash receipts and deposit tic'ets are identical/

b/ The total amounts on the daily cash receipts list and daily deposit slips agree/ c/ The customerGs name and deposit amounts should be the same on the daily cash receipts $ournal and the subsidiary ledger/

d/ e/

Deposit slip totals are accurate/ .eview customer complaints/

f/ +earch for write6offs that are unusual, such as write6offs of balances due from continuing customers/ g/ .eview credit memos/ ractical Consideration: ractitioners may refer to CGs Guide to *raud (nvestigations for more e)tensive fraud detection procedures if it is suspected that the financial statements are materially misstated due to fraud/

Additional Audit Procedures for Accounts Receivable Beginning Balance in Initial Audit
Company Balance Sheet Date

!udit #b$ectives !udit rocedures for Consideration Instructions: !dditional procedures will be necessary in an initial audit/ These procedures are applied to opening balances and differ depending on whether you are relying on your review of a predecessorGs wor' or placing no reliance on a predecessorGs audit/ 3+ection <M>D discusses considerations when replacing a predecessor auditor, including a discussion of what the term reliance means when used in this program/4 These procedures may be applied in con$unction with the basic procedures applied to the ending balance/ The asteris's preceding the procedures indicate that they are an intermediate step in achieving audit ob$ectives for the ending balance/ ; </ (f a predecessorGs audit of the prior periodGs financial statements is to be relied on: a/ .eview the predecessorGs wor'papers containing the aged

N%! &or'paper erformed (nde) by

trial balance of receivables, including the posting of subse5uent cash collections and the summary of confirmation resultsJ consider the ade5uacy of confirmation coverage and results/ b/ .eview the predecessorGs wor'papers on the ade5uacy of the allowance for doubtful accountsJ consider the ade5uacy of procedures and the reasonableness of the conclusion on the balance/ Note the method of determining the balance and compare to the method used in the current period/ c/ (dentify significant noncash credits to receivables during the first three months of the current period and consider whether they relate to the prior period/ Document any items tested/ ; @/ (f no reliance on a predecessorGs audit is planned or possible: a/ +can the aged trial balance of opening accounts receivable, foot the schedule, and trace the total to the general ledger control account/ b/ +can the general ledger control account for significant noncash credits 3write6offs or sales returns and allowances4 for the first three months of the current periodJ consider whether they relate to the prior period/ Document any items tested/ c/ Compare cash collections in the first two months of the current period with the prior period accounts receivable balance/ d/ Compare sales in the first month of the current period with sales in the last month of the prior periodJ consider the reasonableness of the sales cutoff/ e/ #btain and scan a summary of the activity in the allowance for doubtful accounts for the prior periodJ note the method of determining the balance and compare to the method used in the current period/ f/ Compare the following ratios for the current period to the same ratios in the two prior periods/

3<4 3@4 3D4

!ge categories to receivables/ .eceivables to sales/ !llowance for doubtful accounts to receivables and sales/

ractical Considerations: &atch for ma$or customers on the prior period trial balance not on the current period closing trial balance, unusually large noncash credits, and indications of improper cutoff/ +ee the practical considerations for basic procedures < and =/