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Inquire of management about the collectibility of customer balances, particularly those that are large and long overdue
Develop an independent model to estimate the accounts
Review customer correspondence files to gain additional insight into the collectibility of specific accounts
For accounts that are unusually large or past due, review the customer’s latest financial statements to perform an independent anal
Inquire about the client’s procedures for deciding when to write off an account
and long overdue
Substantive procedures are adjusted when specific fraud risk factors are present. Potential fraud risk factors in the revenue cycle in
Excessive credit memos or other credit adjustments to accounts receivable after the end of the fiscal year
Customer complaints and discrepancies in accounts receivable confirma_x0002_tions (for example, disputes over terms, price
Unusual entries to the accounts receivable subsidiary ledger or sales journal
Missing or altered source documents or the inability of the client to pro_x0002_duce original documents in a reasonable period
A lack of cash flow from operating activities when income from operat_x0002_ing activities has been reported
Unusual reconciling differences between the accounts receivable subsidi_x0002_ary ledger and control account
Sales to customers in the last month of the fiscal period at terms more favorable than previous months
Predated or postdated transactions
Large or unusual adjustments to sales accounts just prior to or just after the fiscal year end
The following fraud-related audit procedures can be used to respond to these fraud risk factors:
Perform a thorough review of original source documents, including invoices, shipping documents, customer purchase orders, c
Analyze and review credit memos and other accounts receivable adjust_x0002_ments for the period subsequent to the balance
Analyze all large or unusual sales made near year end and vouch to original source documents
Confirm terms of the transaction directly with the customer, such as the absence of side agreements, acceptance criteria, delive
Compare the number of weeks of inventory in distribution channels with prior periods for unusual changes that may indicate c
Scan the general ledger, accounts receivable subsidiary ledger, and sales journal for unusual activity
Perform analytical reviews of credit memo and write-off activity by comparing to prior periods. Look for unusual trends or pa
Analyze recoveries of written-off accounts
inquire of the company’s non-accounting personnel (e.g., sales and mar_x0002_keting personnel or even in-house legal couns
actors in the revenue cycle include:
, customer purchase orders, cash receipts, and written correspondence between the client and the customer
od subsequent to the balance sheet date
ts, acceptance criteria, delivery and payment terms, the right to return the product, and refund policies
l changes that may indicate channel stuffing
ook for unusual trends or patterns, such as large numbers of credit memos pertaining to one customer or salesper_x0002_son, or those processed shortly a
or even in-house legal counsel) about sales or ship_x0002_ments near year end and whether they are aware of any unusual terms or conditions in connecti
_son, or those processed shortly after the close of the accounting period.
● Payment has already been made—This exception occurs when the cus_x0002_tomer has made a payment before the
confirmation date, but the client has not received the payment before the confirmation date.
Merchandise has not been received—This exception occurs when the cli_x0002_ent records the sale at the date of
shipment and the customer records the purchase when the goods are received. The time the goods are in transit is
typically the cause of this type of exception.
The goods have been returned—This exception might be due to the cli_x0002_ent’s failure to record a credit memo.
Such a failure could result from timing differences or from the improper recording of sales returns and allowances.
Clerical errors and disputed amounts exist—Some exceptions occur because the customer states that there is an error
in the price charged for the goods, the goods are damaged, the proper quantity of goods was not received, or there is
some other type of customer issue. These exceptions should be investigated to determine whether the client’s records
are in error and, if so, the amount of the error. Such differences might have implications for the valuation of the
receivables account. However, what may initially appear to be a timing difference may actually be the result of
lapping
Follow-Up for Negative Confirmations The basic premise underlying negative confirmations is that if no response is
received, the auditor assumes that the customer agrees with the balance. This is not always the correct assumption.
The customer may not respond even though the balance is wrong because (1) the letter was lost, misplaced, or sent to
the wrong address; (2) the customer did not understand the request; or (3) the request was simply ignored and thrown
away. The auditor must have some assur_x0002_ance that the reliability of the negative confirmation process is not
compro_x0002_mised because of any of the factors just described. The auditor does not expect that a large number of
negative confirmations will be returned. How_x0002_ever, when they are returned, reasons for their return include the
following: