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Chapter 15

BUS 426 Chapter Notes - Chapter 15: Audit Risk, Audit Evidence, Analytical Review

Business Administration
Course Code
BUS 426
Michael Favere- Marchesi

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Chapter 15 - Accounts Receivable Cycle
Designing Tests of Details of Balances for A/R
Methodology for Designing Tests of Details of Balances
Evidence Planning Spreadsheet: A working paper used to help
the auditor decide whether planned audit evidence for tests of
details of balances should be low, medium or high for each balance-
related audit objective (Page 229)
Eight Balance-Related Audit Objectives:
o Existence: Recorded accounts receivables exist
o Rights and Obligations: Client has rights to receivables
o Completeness: Existing receivables are included
o Accuracy: Receivables are accurate
o Valuation: Receivables are stated at realizable value
o Classification: Receivables are properly classified
o Detail Tie-In: Receivables in trial balance agree with master
file and also with general ledger
o Cut-Off: Cut-off times for receivables are correct
Seven Disclosure-Related Audit Objectives:
o Occurrence: Receivable balances are for transactions
actually occurred
o Rights and Obligations: Receivables includes only amounts
that are collectable by the company
o Completeness: Receivables are fully included
o Accuracy: Accounts payable balance is materially correct
o Valuation: Receivables are shown at appropriate amounts
that represent what will be collected
o Classification: Correctly grouped as current vs long-term
o Understandability: Information is clearly shown, indicating
the nature and risks of the receivables
Methodology for Designing Tests of Details of Balances Steps
o 1. Set materiality, assess audit risk and inherent risk
and conduct planning analytical review
o 2. Assess control risk for the sales and collection cycle
Occurrence in sales affect the existence of the
Occurrence in cash receipts affect the completeness of
the receivable
Completeness in cash receipts affect the existence of
the receivable
o 3. Identify at-risk assertions
Identify assertions where substantive testing may be
Targets testing that are based upon risk of materiality
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