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Audit of Receivables and Related Revenues

Internal Control over Sales Transactions


Separate departments (or individuals) responsible for the following: Receiving customer orders Preparing sales orders Approving credit Shipping merchandise Billing customers

Internal Control over Sales Transactions


Maintaining the accounts receivable subsidiary ledger Approving of sales returns and allowances Authorizing write-offs of uncollectible accounts

The Revenue Cycle


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Preparation of sales order, which specifies the terms of the customers order for guidance of other division. Upon receipt of the approved sales order, shipping department prepares a serially numbered shipping document and obtains a bill of lading from the common carrier acknowledging receipt of goods.

The Revenue Cycle


3. The billing section accounts for the numerical sequence of shipping documents to assure that an invoice is prepared for all items shipped. 4. An invoice is prepared using the sales order and price data from the sales catalogs and price lists. 5. The sales invoice is reviewed for accuracy of prices, discounts, credit terms, and other

The Revenue Cycle


5. details, after which, is sent to the customer. 6. Daily totals of amounts invoiced should be transmitted to the general ledger section for entry to the Accounts Receivable and Sales accounts. 7. Copies of all sales invoices are transmitted to the accounts receivable section for posting to the subsidiary leader of accounts receivable.

The Revenue Cycle


8. The total of the subsidiary ledger balances should be periodically reconciled with the controlling account by an employee from the operations control group. 9. Receivables judged uncollectible should be written off and transferred to a separate ledger and control account.

Audit Objectives and Procedures


Assertions: I. Existence II. Rights and Obligations Audit Objective: To determine that receivables exist and represent bona fide obligations owed to the company as of the balance sheet date.

Audit Objectives and Procedures


Audit procedures: 1.) Obtain schedule of aged trade accounts receivables and notes receivable schedule and reconcile to the ledger.

Test footings and, cross-footings and aging especially those accounts classified as current, as well as those shown as past due. The selected accounts should be traced to the subsidiary ledgers.

Audit Objectives and Procedures

The totals of schedules prepared by the client personnel should also be compares with the related controlling accounts. The balance of the subsidiary ledger records should be verified by footing the debit and credit columns on a test basis.

Audit Objectives and Procedures


2.) Confirm receivables with debtors.
Determine the method, timing, and the number of confirmation to be requested. a.) Methods Positive and Negative b.) Timing of confirmation - at year end or at an interim date near year-end c.) Extent of confirmation the size of the sample depends on the materiality of AR, evaluation of internal control, the results of confirmation tests in prior year, and the choice between positive and negative.

Audit Objectives and Procedures


2.) Confirm receivables with debtors.
Send confirmation letters to the debtors a.) The request for confirmation should be mailed in envelopes bearing the CPA firms return address. b.) A stamped business reply envelope addresses to the office of the auditors should be enclosed with the request. c.) Include in the confirmation form the details of the transactions such as statement of account or customers purchase order number.

Audit Objectives and Procedures


2.) Confirm receivables with debtors
Investigate any exceptions noted by customers to recorded balances. a.) auditor should resolve unusual or significant differences reported by customers. b.) When replies are not received on accounts with substantial balances, the auditor should verify the existence, location and credit standing of the debtor by reference to other sources independent of the client
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Audit Objectives and Procedures


2.) Confirm receivables with debtors
c.) The auditor should investigate thoroughly if an excessive number of confirmation request to the individual debtors are returned by post office as they may represent fictitious names included by employees of the company engaged in accounts receivable fraud.

Audit Objectives and Procedures


2.) Confirm receivables with debtors

Prepare the summary of the results of confirmation. Perform alternative procedures for any confirmation which are not returned.
a.) Examine collections subsequent to the confirmation date by inspection of incoming checks or remittance advices. b.) Trace invoice number and amounts collected to the individual customers account and to the record of cash receipts and to the bank deposit.

Audit Objectives and Procedures


2.) Confirm receivables with debtors

Perform alternative procedures for any confirmation which are not returned. c.) Examine the customers purchase orders; the clients shipping records, and the sales invoice. d.) Perform analytical procedures for accounts receivable.

Audit Objectives and Procedures


3.) Inspect notes on hand. 4.) Perform analytical procedures to determine whether recorded sales and receivables balances appear reasonable.

Ratio of AR to Sales Ratio of overdue accounts to total accounts receivable Number of average days sales in accounts receivable

Audit Objectives and Procedures


4.) Perform analytical procedures to determine whether recorded sales and receivables balances appear reasonable.

Average annual accounts receivable turnover Percentage of bad-debts expense to the totals sales Ratio of the valuation allowance to accounts receivable Ratio of interest revenue to notes receivable.

Audit Objectives and Procedures


Assertion: III. Completeness Audit Objective: To determine that all transactions relative to receivables have been recorded in the proper accounting period. Audit procedure: 5.) Test cutoff of sales and sales returns to determine whether receivables are recorded in the proper accounting period.

Audit Objectives and Procedures

Done by examining the invoices and shipping documents for several days both before and after the year-end and by tracing such documents to the sales and accounts receivable records for the appropriate period. All substantial sales returns after the balance sheet date should also be reviewed carefully as they may represent fictitious sales recorded at year-end.

Audit Objectives and Procedures


Assertion: IV. Valuation or Allocation Audit Objective: To determine that receivables are recorded and presented at proper amounts in accordance with PAS/PFRS. Audit procedures: 6.) Review collectibility of receivables and determine the adequacy of allowance for doubtful accounts.

Audit Objectives and Procedures

Verify the past-due accounts receivables listed in the aging schedule that have not been paid subsequent to the balance sheet date. Determine credit ratings for delinquent and unusually large accounts. Evaluate confirmation exceptions for indication of amounts in dispute or other clues as to possible uncollectible account.

Audit Objectives and Procedures

Summarize in a working paper those accounts considered to be doubtful of collection based on the preceding procedures. List customer names, doubtful amounts and reasons, considered doubtful. Confer with the credit manager the current status of each doubtful account ascertaining the collection action taken and the opinion of the credit manager as to ultimate collectibility.

Audit Objectives and Procedures


7. Recalculate the interest income from notes receivable.

Independent computation Working paper should include:


Accrued interest receivable at the beg. of the year Interest collected during the year. Accrued interest receivable at the end of the year. Interest earned during the year.

Audit Objectives and Procedures


Assertion: V. Presentation and Disclosure Audit Objective: To determine that the receivables are properly presented and classified in the balance sheet. Audit procedures: 8. Evaluate financial statement presentation and disclosure of receivables.

Audit Objectives and Procedures


9. Obtain written client representations regarding pledge, discount or assignment of receivable, and about receivables from officers, directors, affiliate and other related parties.