Audit of Accounts Receivables (A/R)

Risks Associated with A/R

o Inherent risk - Due to the intentional manipulation of sales in order to reach the target sales or an actua
o Control risk - Failure of internal controls in place

A/R and Revenue Walkthrough

o We are looking for ways that A/R and Sales are over or understated. (WCGW)
o Ask questions like
1 Are receivables subsidiary ledgers reconciled to the general ledger?
2 Is a consistent allowance methodology used?
3 What method is used to compute the allowance and is it reasonable?
4 Who records and approves the allowance?
5 What controls ensure that revenues are recorded in the right period?
6 Is there adequate segregation of duties between persons recording, billing, and collecting pay
7 When are revenues recognized and is the recognition in accordance with the reporting frame

Relevant Assertions of A/R are as follows:

o Existence - The A/R that are shown on the balance sheet at the reporting date really exist.
o Rights and Obligations - The client has the right of controls on the A/R included in the financial statemen
o Completeness - All A/R transactions that should have been recorded have been recorded.
o Valuation - The amount of receivables recorded in the client’s account is mathematically correct and the
o Accuracy
o Classification and Presentation

Audit procedures linked with each assertion

Existence
o Send confirmations to different customers to verify the amount owed by them (This tackles accuracy as w
o Positive confirmation and negative confirmation

Completeness
o Select a sample of shipping documents such as bill and lading and trace back to sale invoices and then to
o Agree individual balance on detailed aged receivables listing to the sales ledger account

Valuation
 o Confirmation will not be helpful enough to value A/R
o Compare the irrecoverable debt expense as percentage of sales & A/R with the previous year and the ind
o Compare A/R turnover and receivables days with the previous year and the industry average
o Obtain and agree the detailed Receivables aging to TB
o Select a sample of old debts the aging report to discuss the recoverability with management and further
o Review and discuss with management on allowance for doubtful accounts
o Examine credit notes issued after year-end that should be made against current period balances

Rights and Obligations

o Concern is usually with factoring of A/R

Other procedures
o Test invoices listed in receivable report.
o Match invoices to shipping log.
o verify that customers have paid the invoices, for which they will want to review check copies and trace t
ch the target sales or an actual fraud to steal the products.

ding, billing, and collecting payments? Who reconciles the related records?
ance with the reporting framework?

date really exist.

uded in the financial statements.
been recorded.
mathematically correct and their balances reflect the actual economic value.

hem (This tackles accuracy as well)

ck to sale invoices and then to sales and A/R ledger account.

dger account
h the previous year and the industry average
e industry average

with management and further review on customers’ response

rrent period balances

view check copies and trace them through your bank account.