Management and Organizational Studies 3363A/B Chapter 13: MOS 3363 - Chapter 13

4 Pages

Management and Organizational Studies
Course Code
Management and Organizational Studies 3363A/B
Michelle Loveland

This preview shows page 1. Sign up to view the full 4 pages of the document.
Completing the Tests in the Sales and Collection Cycle: Accounts Receivable Designing Tests of Details • Recall Chapter 10 when we learned about designing the Tests of Details o Phase 1 = Preplanning o Phase 2 = Building a Client Risk Profile o Phase 3 = Preliminary analytical analysis and preliminary risk assessment o Phase 4 = Developing audit programs, tests of control and substantive tests • This chapter pertains to substantive tests of details and analytical procedures — setting the stage for the auditor to conclude that the audit has accumulated sufficient appropriate audit evidence to reach a conclusion as to whether accounts receivable are fairly presented • Auditing Standards require that Revenue is automatically assessed at a high risk o Unless there are significant reasons to suggest otherwise • The amount of work conducted for assessing Revenue and A/R will be affected by the auditors assessment of inherent risk (high) and the quality of internal controls • The auditor must relate control risk for transaction-related audit objectives in the cycle to the balance-related and presentation and disclosure-related audit objectives in deciding planned detection risk and planned evidence for tests of details of balances. Balance Objective Presentation & Disclosure Risk of Material Effect on Accounts Objective Misstatement in A/R Existence Occurrence Revenue has been recorded Revenue = Overstated when goods have not been A/R = Overstated delivered Rights and Obligations Rights and Obligations Consignment sales are Revenue = Overstated recorded as revenue A/R = Overstated Completeness Completeness Shipments made are not Revenue = Understated billed A/R = Understated Allocation Accuracy Sales recorded in incorrecRevenue & A/R either Over quantity or price (Accuracy of recording) or Understated Valuation Valuation Orders were shipped with Bad debt expense is bad credit risk understated Revenue is recorded in the Allocation Classification incorrect period Revenue = Overstated UE Revenue = Understated Understandability Nature of related parties Users may not properly not described with enough understand relationships detail Table 13-1, pp. 412 A/R Balance Related Objectives A/R Presentation & Disclosure Objectives E R&O C V A O R&O C A V C U Occurrence Sales Completeness Allocation Cut Off Classification Cash Occurrence Receipts Completeness Allocation Classification Cut Off Figure 13-3, pp. 414 Analytical Procedures • Analytical procedures for planning often signal revenue frauds o Fictitious revenue overstates the gross-margin percentage, and lower A/R turnover o Premature revenue recognition overstates gross-margin if costs of sales are not recognized • Management may however, manipulate these accounts to reflect those of previous years • The auditor should review A/R accounts for: o Large and unusual amounts o Amounts that have been outstanding for a long period of time o Receivables from affiliated companies (related third-parties and subsidiaries) o Credit balances Examples of Analytical Procedures for Planning the Sales and Collection Cycle • Comparing Bad-Debt Expense as a percentage of gross-sales o Uncollectable receivables that have not been accounted for • Comparing number of days that A/R is outstanding o Over/understatement of collectable accounts o Over/understatement of bad debt expense • Comparing aging of A/R o Over/understatement of A/R o Over/understatement of Bad Debt Expense • Comparing allowance for uncollectable accounts as a percentage of A/R o Over/understatement of bad debt expense Examples of Analytical Procedures for Substantive Tests • Compare gross margin with that of previous years o Over/understatement of sales and A/R o Errors in sales pricing • Compare sales by month over time o Over/understatement of sales and A/R o Cut off • Examine relationships between sales and cost of sales o Under/overstatement of sales and A/R o Errors in sales or cost of pricing • Compare Sales Returns and Allowances with a percentage of gross sales o Under/overstatement of Sales Returns and Allowances and A/R o Timing errors • Compare individual customer balances overtime o Misstatement in A/R and related Income Statement Accounts o Inadequate bad debt expense o Overstated sales From Assertions to Tests • The appropriate tests of details of balances depend upon the factors incorporated into the evidence planning spreadsheet, which is a working paper designed by the auditor to decide whether Planned Detection Risk (PDR) should be assessed as low, medium or high for different account balances o See figure 13-8, pp. 431 for examples of different risk levels • Tests of details of balances for all cycles emphasize balance sheet accounts, and income statement accounts are verified more as a by-product of the balance sheet tests. o If the auditor finds account receivable balances are overstated due to mistakes in billing customers, there are overstatements in both the Balance Sheet and Income Statement External Confirmation of Accounts Receivable • External Confirmations as audit evidence obtained as a direct written response to the auditor from a third
More Less
Unlock Document

Only page 1 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.