14 - 1 copyright 2003 pearson education canada inc. chapter 14 completing the tests in the sales...
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14 - 1Copyright 2003 Pearson Education Canada Inc.
CHAPTER 14 Completing the
Tests in the Sales and Collection
Cycle: Accounts Receivable
14 - 2Copyright 2003 Pearson Education Canada Inc.
An An aged trial balanceaged trial balance is the basis for is the basis for many tests of A/R and the allowance many tests of A/R and the allowance
for uncollectible accounts.for uncollectible accounts. 12/31/04 AGE, BASED ON INVOICE DATECUSTOMER BALANCE 0 -30 31-60 61-90 OVER 90AKINC 1276 170 1106BOWERS 534 534DEWASTALI 7523 7100 423DUNKLEBURG 97 97EASLEY 23000 21000 2000 EWING 8969 8969GOHO 1500 1500HARRISON 56900 56900MCCRAY 6500 6500 106299 30304 3203 6923 65869
14 - 3Copyright 2003 Pearson Education Canada Inc.
??GAAS GAAS requires requires confirmation confirmation
of a sample of a/r of a sample of a/r unlessunless::
14 - 4Copyright 2003 Pearson Education Canada Inc.
GAAS GAAS requires requires confirmation confirmation of a sample of a/r of a sample of a/r unlessunless::
- combined IR & CR is low
14 - 5Copyright 2003 Pearson Education Canada Inc.
GAAS GAAS requires requires confirmation confirmation of a sample of a/r of a sample of a/r unlessunless::
- combined IR & CR is low- use of confirmations would be ineffective
14 - 6Copyright 2003 Pearson Education Canada Inc.
A/R confirmations are A/R confirmations are effective in discovering:effective in discovering:
??
14 - 7Copyright 2003 Pearson Education Canada Inc.
A/R confirmations are A/R confirmations are effective in discovering:effective in discovering:
- fictitious accounts (existence)
14 - 8Copyright 2003 Pearson Education Canada Inc.
A/R confirmations are A/R confirmations are effective in discovering:effective in discovering:- fictitious accounts (existence)- incorrect amounts (accuracy)
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A/R confirmations A/R confirmations may may help in discovering:help in discovering:
- uncollectibles
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A/R confirmations are A/R confirmations are notnot effective in discovering:effective in discovering:
??
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omitted accounts (completeness)
A/R confirmations are A/R confirmations are notnot effective in discovering:effective in discovering:
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Why might a client Why might a client intentionally omitintentionally omit some a/r? some a/r?
12/31/04 AGE, BASED ON INVOICE DATECUSTOMER BALANCE 0 -30 31-60 61-90 OVER 90AKINC 1276 170 1106BOWERS 534 534DEWASTALI 7523 7100 423DUNKLEBURG 97 97
EWING 8969 8969GOHO 1500 1500
MCCRAY 6500 6500?
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Why might a client Why might a client intentionally omitintentionally omit some a/r? some a/r?
The client may not wish to disclose a/r
of related parties.
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A/R confirmations may be A/R confirmations may be either either positivepositive or or negativenegative. .
What is the difference?What is the difference?
+ -
14 - 15Copyright 2003 Pearson Education Canada Inc.
A/R confirmations may be A/R confirmations may be either either positivepositive or or negativenegative. .
What is the difference?What is the difference?
Negative confirmations request a re-sponse only if the debtor believes thatthe amount printed on the confirmationis incorrect.
14 - 16Copyright 2003 Pearson Education Canada Inc.
A/R confirmations may be A/R confirmations may be either either positivepositive or or negativenegative. .
What is the difference?What is the difference?Negative confirmations request a re-sponse only if the debtor believes thatthe amount printed on the confirmationis incorrect.Positive confirmations request that thedebtor respond whether or not the bal-ance is correct or they ask the debtor toindicate the amount owed at a certain date.
14 - 17Copyright 2003 Pearson Education Canada Inc.
Which form of A/R Which form of A/R confirmation is more confirmation is more reliablereliable, ,
positive or negative?positive or negative?
14 - 18Copyright 2003 Pearson Education Canada Inc.
Which form of A/R confirmation is Which form of A/R confirmation is more more reliablereliable, positive or negative?, positive or negative?
A nonresponse to a positive confirmation is investigated.
morereliable
A nonresponse to a negative confirmationis assumed to signify debtor agreementwith client balance. This may be anerroneous assumption. Why?
14 - 19Copyright 2003 Pearson Education Canada Inc.
Which form of A/R confirmation is more Which form of A/R confirmation is more expensiveexpensive, positive or negative?, positive or negative?
+ -
14 - 20Copyright 2003 Pearson Education Canada Inc.
Which form of A/R confirmation is more Which form of A/R confirmation is more expensiveexpensive, positive or negative?, positive or negative?
Positive confirmations are more expensivebecause they require more return postage and follow-up procedures if they are not returned.All positive confirmations should be returned;negative confirmations are returned only ifamounts are disputed.
Auditor
Client Customer
paid byauditor
Canada 48
14 - 21Copyright 2003 Pearson Education Canada Inc.
In deciding whether to use In deciding whether to use positive or negative positive or negative
confirmations, consider:confirmations, consider:
??
14 - 22Copyright 2003 Pearson Education Canada Inc.
In deciding whether to use In deciding whether to use positive or negative positive or negative
confirmations, consider:confirmations, consider:- prior experience with client, industry- nature of information being confirmed- appropriate respondents- effectiveness of internal controls- number of account balances and debtors
14 - 23Copyright 2003 Pearson Education Canada Inc.
What is the preferable What is the preferable timingtiming for for confirmation procedures?confirmation procedures?
14 - 24Copyright 2003 Pearson Education Canada Inc.
What is the preferable What is the preferable timingtiming for for confirmation procedures?confirmation procedures?
the balance sheet date WHY?
December
14 - 25Copyright 2003 Pearson Education Canada Inc.
Could confirmation procedures Could confirmation procedures occur during occur during interim testinginterim testing??
October
14 - 26Copyright 2003 Pearson Education Canada Inc.
Yes, if the internalcontrols after theinterim date are
consideredadequate.
Could confirmation procedures Could confirmation procedures occur during occur during interim testinginterim testing??
14 - 27Copyright 2003 Pearson Education Canada Inc.
Confirmation SequenceConfirmation Sequence
what’sfirst?
14 - 28Copyright 2003 Pearson Education Canada Inc.
12/31/04 AGE, BASED ON INVOICE DATECUSTOMER BALANCE 0 -30 31-60 61-90 OVER 90AKINC 1276 170 1106BOWERS 534 534DEWASTALI 7523 7100 423DUNKLEBURG 97 97EASLEY 23000 21000 2000 EWING 8969 8969GOHO 1500 1500HARRISON 56900 56900MCCRAY 6500 6500 106299 30304 3203 6923 65869
Confirmation SequenceConfirmation Sequence
obtaina/r aging
14 - 29Copyright 2003 Pearson Education Canada Inc.
12/31/04 AGE, BASED ON INVOICE DATECUSTOMER BALANCE 0 -30 31-60 61-90 OVER 90AKINC 1276 170 1106BOWERS 534 534DEWASTALI 7523 7100 423DUNKLEBURG 97 97EASLEY 23000 21000 2000 EWING 8969 8969GOHO 1500 1500HARRISON 56900 56900MCCRAY 6500 6500 106299 30304 3203 6923 65869
Confirmation SequenceConfirmation Sequence
obtaina/r aging
selectspecific
a/r forconfirma-
tion
14 - 30Copyright 2003 Pearson Education Canada Inc.
Confirmation SequenceConfirmation Sequence
obtaina/r aging
selectspecific
a/r forconfirma-
tion
how?-judgmentally?-statistically?-client involvement?
14 - 31Copyright 2003 Pearson Education Canada Inc.
Confirmation SequenceConfirmation Sequence
obtaina/r aging
selectspecific
a/r forconfirma-
tion
print confirmations and mail them
14 - 32Copyright 2003 Pearson Education Canada Inc.
Confirmation SequenceConfirmation Sequence
obtaina/r aging
selectspecific
a/r forconfirma-
tion
print confirmations and mail them
analyzeresults,
investigatedisputedamounts
14 - 33Copyright 2003 Pearson Education Canada Inc.
Confirmation SequenceConfirmation Sequence
What if the response rateWhat if the response rateis is unacceptably lowunacceptably low??
obtaina/r aging
selectspecific
a/r forconfirma-
tion
print confirmations and mail them
analyzeresults,
investigatedisputedamounts
14 - 34Copyright 2003 Pearson Education Canada Inc.
Confirmation SequenceConfirmation Sequence
What if the response rateWhat if the response rateis is unacceptably lowunacceptably low??
obtaina/r aging
selectspecific
a/r forconfirma-
tion
print confirmations and mail them
analyzeresults,
investigatedisputedamounts
Consider the cost/benefitof a second mailing.
14 - 35Copyright 2003 Pearson Education Canada Inc.
Confirmation SequenceConfirmation Sequence
What if the response rate What if the response rate for the for the second mailingsecond mailing is is
unacceptably low?unacceptably low?
obtaina/r aging
selectspecific
a/r forconfirma-
tion
print confirmations and mail them
analyzeresults,
investigatedisputedamounts
14 - 36Copyright 2003 Pearson Education Canada Inc.
Confirmation SequenceConfirmation Sequence
What if the response rate What if the response rate for the for the second mailingsecond mailing is is
unacceptably low?unacceptably low?
obtaina/r aging
selectspecific
a/r forconfirma-
tion
print confirmations and mail them
analyzeresults,
investigatedisputedamounts
Consider the cost/benefitof a third mailing.
14 - 37Copyright 2003 Pearson Education Canada Inc.
Confirmation SequenceConfirmation Sequence
obtaina/r aging
selectspecific
a/r forconfirma-
tion
print confirmations and mail them
analyzeresults,
investigatedisputedamounts
What if the response rate What if the response rate for allfor allmailingsmailings is unacceptably low? is unacceptably low?
14 - 38Copyright 2003 Pearson Education Canada Inc.
Confirmation SequenceConfirmation Sequence obtaina/r aging
selectspecific
a/r forconfirma-
tion
print confirmations and mail them
analyzeresults,
investigatedisputedamounts
What if the response rate What if the response rate for allfor allmailingsmailings is unacceptably low? is unacceptably low?
Use alternative proceduresto determine existence and
accuracy of a/r or:
14 - 39Copyright 2003 Pearson Education Canada Inc.
Confirmation SequenceConfirmation Sequence obtaina/r aging
selectspecific
a/r forconfirma-
tion
print confirmations and mail them
analyzeresults,
investigatedisputedamounts
What if the response rate What if the response rate for allfor allmailingsmailings is unacceptably low? is unacceptably low?
Treat the non-response as an error to be projected to the
population
14 - 40Copyright 2003 Pearson Education Canada Inc.
ideas?ideas?
Use alternative proceduresto determine existence and
accuracy of a/r.
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- examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r
Use alternative proceduresto determine existence and
accuracy of a/r.
Pace Corporation 324
$
Bank of Montreal
pay to the order of
date
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- examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r- examine bills of lading and shipping documentation
Use alternative proceduresto determine existence and
accuracy of a/r.
ACE
14 - 43Copyright 2003 Pearson Education Canada Inc.
- examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r- examine bills of lading and shipping documentation- examine sales invoices
Use alternative proceduresto determine existence and
accuracy of a/r.
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- examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r- examine bills of lading and shipping documentation- examine sales invoices- examine client correspondence
Use alternative proceduresto determine existence and
accuracy of a/r.
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- examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r- examine bills of lading and shipping documentation- examine sales invoices- examine client correspondence
Which of these procedures Which of these procedures has the greatest reliability?has the greatest reliability?
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those involving third parties
- examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r- examine bills of lading and shipping documentation- examine sales invoices- examine client correspondence
Which of these procedures has the Which of these procedures has the greatest reliability?greatest reliability?
14 - 47Copyright 2003 Pearson Education Canada Inc.
Dear auditor:
We received yourconfirmation dated1/30. Unfortunate-ly, our bookkeepingsystem does not allow us to confirmany balances otherthan the currentbalance. SORRY! Client Customer
What if the What if the auditor auditor
receives a receives a response response
similar to this?similar to this?
14 - 48Copyright 2003 Pearson Education Canada Inc.
What if the What if the auditor auditor
receives a receives a response response
similar to this?similar to this?
Dear auditor:
We received yourconfirmation dated1/30. Unfortunate-ly, our bookkeepingsystem does not allow us to confirmany balances otherthan the currentbalance. SORRY! Client Customer
- contact customer and encourage a satisfactory response
14 - 49Copyright 2003 Pearson Education Canada Inc.
What if the What if the auditor auditor
receives a receives a response response
similar to this?similar to this?
Dear auditor:
We received yourconfirmation dated1/30. Unfortunate-ly, our bookkeepingsystem does not allow us to confirmany balances otherthan the currentbalance. SORRY! Client Customer
- contact customer and encourage a satisfactory response- consider alternative procedures
14 - 50Copyright 2003 Pearson Education Canada Inc.
What if the What if the auditor auditor
receives a receives a response response
similar to this?similar to this?
Dear auditor:
We received yourconfirmation dated1/30. Unfortunate-ly, our bookkeepingsystem does not allow us to confirmany balances otherthan the currentbalance. SORRY! Client Customer
- contact customer and encourage a satisfactory response- consider alternative procedures- treat as error to be projected to the population
14 - 51Copyright 2003 Pearson Education Canada Inc.
Confirmation SequenceConfirmation Sequence
statistically and/or judgmentally determine whether the
extent of exceptions will affect internalcontrol evaluation and acceptability
of a/r balance
obtaina/r aging
selectspecific
a/r forconfirma-
tion
print confirmations and mail them
analyzeresults,
investigatedisputedamounts
14 - 52Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- confirm a sample of a/r
14 - 53Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- confirm a sample of a/r- inquire about third party claims to client receivables (e.g., pledging)
14 - 54Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- confirm a sample of a/r- inquire about third party claims to client receivables (e.g., pledging)- perform analytical procedures on receivables and related accounts (sales, bad debt expense, allowance for uncollectible accts.)
14 - 55Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- perform analytical procedures on receivables and related accounts- review year-end cutoff for sales. Examine all sales invoices and related shipping documents and cash receipts for several days before and after the balance sheet date.
Determine when titleto the goods passed.
14 - 56Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- perform analytical procedures on receivables and related accounts- review year-end cutoff for sales- after reviewing a/r aging, discuss pos- sible a/r write-offs and the adequacy of the allowance with management
14 - 57Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- perform analytical procedures on receivables and related accounts- review year-end cutoff for sales.- after reviewing a/r aging, discuss possible a/r write-offs and the adequacy of the allowance with management- inspect notes receivable
14 - 58Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- perform analytical procedures on receivables and related accounts- review year-end cutoff for sales.- after reviewing a/r aging, discuss possible a/r write-offs and the adequacy of the allowance with management- inspect notes receivable- vouch a sample of a/r to customer order, sales order, sales invoice, shipping documents, cash receipts
14 - 59Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- trace a sample of accounts from trial
balance to master file and vice versa
14 - 60Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- trace a sample of accounts from trial
balance to master file and vice versa - foot trial balance and aging columns
14 - 61Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- trace a sample of accounts from trial
balance to master file and vice versa - foot trial balance and aging columns- trace a/r trial balance/master file to
general ledger
14 - 62Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- trace a sample of accounts from trial
balance to master file and vice versa - foot trial balance and aging columns- trace a/r trial balance/master file to
general ledger- review aged trial balance for related
party transactions
14 - 63Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- trace a sample of accounts from trial
balance to master file and vice versa - foot trial balance and aging columns- trace a/r trial balance/master file to
general ledger- review aged trial balance for related
party transactions- inquire of management about related
party transactions, and likelihood of collecting older accounts.
14 - 64Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- review sales returns and allowances
after balance sheet date
14 - 65Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- review sales returns and allowances
after balance sheet date - trace a sample of accounts from aged
trial balance to a/r master file
14 - 66Copyright 2003 Pearson Education Canada Inc.
Receivables Audit ProceduresReceivables Audit Procedures- review sales returns and allowances
after balance sheet date - trace a sample of accounts from aged
trial balance to a/r master file- review of minutes of meetings