ABC Company Audit Program – Receivables Department: AUDIT OBJECTIVES: To determine whether: 1.

Receivables represent all amounts owed to the entity at the balance sheet date and have been properly recorded. 2. The allowances for doubtful accounts, returns and allowances and discounts are adequate but not excessive. 3. Receivables are properly described and classified and adequate disclosures with respect to these amounts (including disclosures of amounts that have been pledged, discounted or sold with recourse or are with related parties) have been made. AUDIT PROCEDURES: Procedures
1) ANALYTICAL PROCEDURES—GENERAL

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a)

Compare the balance of each significant receivable account with the comparable balance for the preceding period. Investigate significant or unusual fluctuations.

b) Compute the receivables turnover ratio (average receivables to net revenues) for the current period. Compare with the comparable ratio for the preceding period and consider its reasonableness in relation to revenue volatility, credit policy, collectability, etc. Investigate significant or unusual fluctuations. c) Compute the average number of days of revenues in receivables for the current period. Compare with the comparable ratio for the preceding period and with industry statistics. Investigate significant or unusual fluctuations.

2) TESTS OF THE RECEIVABLES SUBSIDIARY LEDGER a) Have the client prepare a reconciliation of the receivables subsidiary ledger to the general ledger control accounts as of the circularization or balance sheet date. Verify the clerical accuracy of the reconciliation and test it as follows: i) Trace control account totals to the general ledger and subsidiary ledger totals to their source. ii) Examine supporting documentation for significant or unusual reconciling items. Scope:( ) b) Foot or test foot the subsidiary ledger to ensure that all recorded receivables balances are included in the totals. c) Scan the subsidiary ledger for unusual balances or amounts (e.g., credit balances, amounts due from related parties, etc.). Investigate and examine supporting documentation, as appropriate. Consider including such accounts in the circularization scope.

3) TESTS OF TRANSACTIONS OF RECEIVABLES

a)

Have the client prepare an analysis of the activity in the general ledger control accounts from the interim date to the balance sheet date. Test the activity as follows: i) Compare the levels of the various types of activity (e.g., revenues, collections, etc.) in the accounts with the comparable amounts for prior and subsequent interim periods for the current and preceding periods. Investigate significant trends or fluctuations. ii) Review the general ledger entries for reasonableness. Obtain explanations for and inspect underlying accounting data (registers, journals or journal entries) for general ledger entries that appear to be unusual in nature, source or amount. iii) Trace the general ledger entries to the sources of original entry. Scan the books of original entry for transactions that appear unusual in nature, source or amount. Examine underlying support as appropriate. Scope:( )

c)

Have the client prepare a reconciliation of the receivables subsidiary ledger to the general ledger control accounts as of the balance sheet date. Verify the clerical accuracy of the reconciliation and test it as follows: i) Compare the nature and amount of reconciling items with the comparable items as of the interim date. Investigate significant or unusual fluctuations. ii) Trace individual receivable balances from the subsidiary ledger to the detail receivable records. Test the clerical accuracy of the detail records. Scope:( )

d) Scan the receivables subsidiary ledger and consider circularizing or performing alternative procedures on significant outstanding balances not previously confirmed. 4) EVALUATION OF THE ADEQUACY OF ALLOWANCE FOR DOUBTFUL ACCOUNTS a) THE

Evaluate the following items and their impact on our review of the adequacy of the allowance for doubtful accounts. Document in a memorandum your findings related to: • Changes in the client's credit and collection policies that have occurred during the audit period, including changes that have since been reversed or modified. • Impact of new products or new markets and whether they involve a different, higher-risk customer. • General economic conditions and trends adversely affecting the client's customers. • Other ratios, trends or relationships that are

unique to the client or its industry which relate to receivables valuation. • Changes in methods, definitions or criteria for aging accounts that might affect comparability of the data. b) Have the client prepare an analysis of the allowance for doubtful accounts for the current audit period. Verify the clerical accuracy of the analysis and test it as follows: (1) Cross-reference the provision for the current period to the appropriate expense lead schedule. (2) Compare the provision, write-offs, recoveries and the ending balance for the current period with the comparable amounts for the preceding audit period. Investigate significant or unusual fluctuations. (3) Test write-offs during the current period as follows: (a) Review the listing of accounts written off and reconcile the totals with the amounts charged to the allowance for doubtful accounts. (b) Determine whether proper approvals were obtained for selected write-offs. Scope:( ) c) Obtain a copy of the client's aging of receivables. Test the aging as follows: i) Test the clerical accuracy of footings and cross footings. Scope:( ) ii) Compare the aging statistics with those of prior periods. Investigate significant trends or fluctuations. iii) Trace the aging information for selected accounts to subsidiary ledgers and to supporting critical forms and documents ( ). Concentrate the test on accounts reflected as "current." Recalculate the aging of the account balances. Scope:( ) iv) Be alert for receivables that should be written off, under the client's criteria. d) Have the client prepare a listing of individual large and/or past due receivables for specific review of their probable collectability. The client's evaluation of each receivable and subsequent cash collections should be indicated on the schedule. Scope:( ) i) Relate the totals of individual receivables listed to the client's aging of receivables. Ensure that significant past due receivables are not omitted from the listing. ii) Trace subsequent cash receipts to the cash records and examine remittance advices. Scope:( ) iii) Identify any customers with "locked-in" receivable

positions and consider the implications thereof. iv) Discuss the accounts with informed client personnel to obtain additional background information. v) If additional work is necessary to satisfy yourself regarding the probable collectability of an unpaid balance, consider the following: (1) Review credit and collection files and the debtor's or customer's financial statements. (2) Obtain reports of credit bureaus or credit reporting companies. vi) Identify a range of specific allowances required for the total individual receivables reviewed. e) To provide a basis for identifying a range of general allowances required for receivables not individually reviewed above, perform the following analytical procedures: i) Calculate the percentages of the allowance for doubtful accounts to total receivables and to receivables aged over 60 days. Compare with similar percentages for prior periods. Investigate significant fluctuations or trends. ii) Calculate the percentage of accounts written off to credit sales and average receivables for the period. Compare with the similar percentages for prior periods. Investigate significant fluctuations or trends. iii) Calculate the percentage of the provision for doubtful accounts to gross sales. Compare with the similar percentage for prior periods and with industry statistics. Investigate significant fluctuations or trends. iv) Based upon the above percentages, the review of the aging and historical write-off statistics, identify a range of general allowances required for receivables not specifically reviewed above. f) Summarize the results of our specific and general review of the collectability of receivables and determine an acceptable range of adequacy of the allowance for doubtful accounts. Adjust the identified range for other factors identified above that influence the collectability of receivables.

g) Compare the balance of the allowance for doubtful accounts as of the balance sheet date with the acceptable range determined above. Propose an adjustment, as appropriate, to ensure that the allowance falls within the acceptable range. 5) EVALUATION OF THE ADEQUACY OF ALLOWANCES FOR SALES DISCOUNTS, RETURNS AND ALLOWANCES b) Review the client's current policies regarding sales discounts, returns and allowances. Examine selected

sales contracts to verify return policies and terms. Identify changes from the prior period and evaluate the effect of these changes. c) Have the client prepare an analysis of the allowances for sales discounts, returns and allowances for the current period. Verify the clerical accuracy of the analysis and test it as follows: i) ii) iii) Cross-reference the provision for the current period to the appropriate expense lead schedule. Compare the activity for the current period with the comparable amounts for the preceding audit period. Investigate significant or unusual fluctuations. Examine remittance advices and revenue invoices for significant discounts to determine whether discounts allowed are consistent with the client's policies. Investigate credits representing sales returns or discounts for amounts that appear abnormal. Verify that sales returns and allowances have been properly authorized. Review the accounting for the numerical sequence of documents supporting goods returned by customers, claims made and credit memoranda.

iv) v) vi)

d) To provide a basis for evaluating the adequacy of the allowances for sales discounts, returns and allowances perform the following analytical procedures: i) Calculate the percentage of the allowances for sales discounts, returns and allowances to total receivables. Compare with similar percentages for prior periods and with industry statistics. Investigate significant fluctuations or trends. ii) Calculate the percentage of customer discounts, returns and allowances for the current period to gross sales. Compare with similar percentages for prior periods and with industry statistics. Investigate significant fluctuations or trends. iii) Relate the percentages calculated in the previous steps and investigate significant differences between them. e) Inquire of knowledgeable client personnel whether there have been (1) problems with product design or production which have resulted (or are expected to result) in higher than normal returns and allowances or (2) an extension of the period covered by the right-ofreturn policy. Evaluate the magnitude of returns subsequent to the balance sheet date for evidence of production problems during the audit period. Review significant sales returns and credit memos issued subsequent to the balance sheet date to determine whether they were properly authorized and recorded in the proper period.

f)

g) Based upon the information gathered, evaluate the adequacy of the allowance for sales discounts, returns

and allowances. Propose an adjustment, as appropriate. 5) NOTES AND LOANS RECEIVABLE a) Have the client prepare a listing of notes and loans receivable, acceptances and other instruments evidencing indebtedness to the client. Test the listing as follows: i) Test the clerical accuracy of the footings of the listing and trace the totals to the general ledger control accounts. ii) Control undeposited cash receipts to the depository. Determine whether the deposit appears as an intransit item on the bank reconciliation of the proper account and that it was accepted by the depository without material subsequent adjustment. b) Trace the information on the schedule to detailed records, on a test basis. Scope:( ) c) Verify the payee, endorser, maker, principal amount, original date, maturity date and interest rate of selected notes by examining the actual notes. Examine any collateral. Scope:( )

d) Identify notes from trade debtors or customers and evaluate the need for separate classification in the financial statements. e) Consider the collectability of the unpaid balances of notes and loans receivable during the review of the adequacy of the allowance for doubtful accounts. i) Discuss the origin of the balances with the client and evaluate the adequacy of any collateral pledged. ii) Determine whether payments have been made on a timely basis during the period and are not past due at the balance sheet date. f) For notes or loans receivable with terms greater than one year, test the classification between current and noncurrent. Consider classifying any notes in dispute or litigation entirely as noncurrent.

6) INTERCOMPANY RECEIVABLES a) Obtain an understanding of the nature of the intercompany receivables, including the following: • • • • • How they arose. How they are being or are to be liquidated. What security exists. What the funds were used for. What the tax implications are.

b) If the transactions are other than routine transfers of goods and services, inspect supporting critical forms and documents ( ). Scope:( ) c) Tie amounts to the intercompany payables reflected in

the audit working papers for the affiliates. If the intercompany accounts are not in balance, have client personnel prepare reconciliations. Examine support for significant or unusual reconciling items. Propose adjustments for unrecorded transactions, if appropriate. d) Cross-reference the balances to the elimination entry for consolidation. 7) INTEREST RECEIVABLE a) Have the client prepare an analysis of activity in the interest receivable accounts related to notes, loans or past due trade receivables during the period. Verify the clerical accuracy of the analysis and test it as follows: i) Cross-reference interest income for the period to the appropriate lead schedule. ii) Compare interest income for the period and the period-end interest receivable balance with comparable amounts for the preceding period. Investigate significant or unusual fluctuations. iii) Perform a predictive test of interest income for the period, based on the average balance of notes, loans or past due trade receivables outstanding during the period and the average stated interest rate. Investigate significant differences between the predicted and recorded amounts. b) Consider the collectability of the interest receivable during the review of the collectability of the related receivables. 8) OTHER RECEIVABLES a) Review other receivables. Consider the need to confirm amounts or to examine supporting documentation. Scope:( )

9)

ANSWER INTERNAL CONTROL QUESTIONNAIRES (ICQ B-1 and B-2)

10) SUPERVISION, REVIEW AND CONCLUSIONS

a) Conclude responsive to the audit objectives. b) Prepare points regarding internal controls and other business matters. c) Perform senior review and supervision. d) Clear senior review points. e) Clear manager review points.

PERFORMED BY:

REVIEWED BY:

Audit Assistant

Audit Supervisor

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