AP-3: ⇒Audit Program for Accounts

Receivable
Company Balance Sheet Date

The company has the following general ledger accounts that are classified in the accounts, notes,
or other receivables captions of the balance sheet:
General
Ledger Description or Brief Purpose Current or
Number of the Account Noncurrent Asset?

Audit N/A Workpaper

Objectives Performed Index
Audit Procedures for Consideration by
FINANCIAL STATEMENT ASSERTIONS
E/O Existence or occurrence. V/A Valuation or allocation.
C Completeness. P/D Presentation and disclosure.
R/O Rights and obligations.

AUDIT OBJECTIVES

A. Accounts receivable are authentic obligations owed to the

company at the balance sheet date (assertions E/O, R/O, and V/A).
B. Accounts receivable include all amounts owed to the
company at the balance sheet date (assertion C).
C. The allowance for doubtful accounts is adequate but not
excessive. If the direct write-off method is used, all significant
 doubtful accounts have been written off, and the bad debt exposure
in the remaining accounts is insignificant (assertions V/A and P/D).
D. Pledged, discounted, or assigned accounts receivable are
properly disclosed. Related party receivables are properly disclosed
(assertions R/O and P/D).
E. Accounts receivable are appropriately classified in the
balance sheet, and required disclosures are made (assertion P/D).
IDENTIFICATION CODES

The letters preceding each of the above audit objectives, i.e., A, B,

etc., serve as identification codes. These codes are presented in the
left column labeled “Audit Objectives” when a procedure
accomplishes an objective. If the alpha code appears in a bracket,
e.g., [A], [B], etc., the audit procedure only secondarily
accomplishes the objective. If an asterisk precedes a procedure, it is
a preliminary step or a follow up step that does not accomplish an
objective.
BASIC PROCEDURES
* 1. Obtain or prepare an aged trial balance of accounts
receivable.
a. If the trial balance is prepared by the client, test the clerical
accuracy. Do not test the accuracy of the aging of individual
accounts until you start Step 7.
b. Briefly inquire of management as to steps taken to ensure
the trial balance is complete, i.e., that all receivables due the
company are included on the trial balance. (See also Step 10.)
c. Reconcile the balance to the general ledger account
balance.
Practical Considerations:

¯ Meet with the client before the balance sheet date and arrange
for a duplicate copy of the trial balance for your workpapers.
¯ If the aged trial balance is computer generated, consider using
computer audit software (such as IDEAtor ACLt) to test the
mechanical accuracy.
¯ If the client uses packaged accounting software and the auditor
has determined that the client is unable to make changes to
program coding, testing the mechanical accuracy of the accounts
receivable trial balance may not be necessary. If procedures are
performed to test mechanical accuracy in this situation, they may
be limited.
¯ If the listing is manually prepared, instruct the client to identify
 each customer and account number on the aging and to leave
adequate space to record subsequent collections. Stress the
importance of clarity and neatness in preparing the schedule as it
will be the primary worksheet.
¯ Utilize client employees whenever possible to reduce the time
required to test clerical accuracy. For example, for long reports,
remove several pages and have the client foot the remaining pages,
then add your page totals. Also, avoid footing all the columns on
the trial balance. Instead, foot two columns and crossfoot the total
line.
* 2. Review the aged trial balance to determine if there are
natural groups within the total population of accounts. See
paragraphs 401.5 and 401.10 for guidance.
Practical Considerations:

¯ Identifying groups within the accounts receivable population

can lead to more efficient testing of accounts. The following groups
normally exist in the population: (Use CX-7a to assist you.)
¯¯ Customers with individually significant account balances or
one customer with numerous small account balances that, when
totaled, are significant. See paragraph 401.4 for guidance on
determining an individually significant amount.
¯¯ Accounts with unusual characteristics other than the dollar
amount of the balance. Such characteristics might include
significant past due balances, an unusual customer name, accounts
prone to misstatement, etc.
¯¯ Accounts with credit balances.
¯¯ Related party accounts.
¯¯ All other accounts.
¯ The groups do not need to be documented or listed in a
separate schedule. Tickmarks can be used to identify accounts
within a group, or you can simply have a mental awareness of each
individual group. Groups may also be identified by simply
scanning the trial balance.
A, E, 3. Select those groups that will be confirmed 100% by the use
[B], [C] of positive confirmation letters. (Do not confirm accounts until the
subsidiary ledger has been reconciled to the general ledger. See
Step 1.)
a. Identify the accounts selected on the aged trial balance.
b. Review those accounts selected for confirmation with the
owner/manager. If the client objects to a confirmation with a
particular customer, determine if this restriction will affect your
ability to accomplish the audit objectives for receivables.
c. Have the client prepare the positive confirmation letters
reflecting, if possible, on the face of the letter or in an attached
statement, the individual invoice number, invoice date, and invoice
amounts that make up the customer’s balance.
d. Include the audit firm’s return address on all envelopes to
ensure that all confirmation requests that are undeliverable by the
post office are returned directly to the audit firm.
e. Be sure that the confirmations are to be returned directly to
the auditor and contain a return envelope for this purpose.
f. Control the mailing of the letters.
g. Send second requests approximately 10 days after the first
mailing. Determine the cause for confirmation requests returned as
undeliverable. If possible, obtain new addresses and remail.
h. Retain copies of all confirmations in the workpapers.
Practical Considerations:

¯ SAS No. 96, Audit Documentation, requires documentation of

substantive tests of details involving inspection of documents or
confirmation to include identification of the items tested. The
authors believe items tested can be identified by listing the items;
by including a detail schedule in the workpapers, such as an aged
trial balance, on which the items are identified; or by documenting
in the workpapers the source and selection criteria. For example:
¯¯ For tests of significant items, documentation may describe the
auditor’s scope and the source of the items (for example, all
account balances greater than $5,000 from the 12/31/X2 accounts
receivable detail).
¯¯ For haphazard or random samples, documentation should
include the identifying characteristics of the items (for example, the
specific invoice numbers, customer account numbers, etc.).
¯¯ For systematic samples, documentation may indicate the
source, starting point, and sampling interval (for example, a
selection of accounts from the 12/31/X2 accounts receivable detail,
starting with account number 2150 and selecting every 10th
account thereafter).
SAS No. 96 is effective for audits of financial statements for
periods beginning on or after May 15, 2002, with early application
permitted.
¯ There is a presumption auditors will confirm accounts
receivable. If accounts receivable are not confirmed, SAS No. 67
requires auditors to document how they overcame that
presumption.
¯ Many auditors assign a numerical or alpha code to each
customer selected for confirmation and record this code by the
account on the aged trial balance and on the confirmation letter, for
example, confirmation 1, 2, 3, etc. This makes check-in of replies
easier.
¯ The auditor should obtain photocopies of positive confirmation
letters and any attached statements for sending second requests and
documenting performance of alternative procedures for nonreplies.
The “Confirmation and Correspondence Control” at CX-24 can be
used to monitor the status of confirmations.
¯ It may be helpful to record a client code on the return envelope
to facilitate routing of the reply to the appropriate client mail file in
the auditor’s office. This may be especially helpful during peak
periods when the firm has several audits in progress.
¯ Some customers may have different billing vs. shipping
addresses. Inquire if the proper address is used.
¯ The wording of the request should be clear and simple. A
deadline date can also enhance the response time. See the sample
accounts receivable confirmation letters at CL-7 through CL-11.
Also, see paragraph 703.4 for other suggestions for improving
confirmation responses.
¯ If possible, client personnel should prepare the letters. If there
are numerous letters, a word processing mail merge can be used to
insert the mailing address, salutation, and account balance into the
form letter.
¯ The auditor should mail the letters or accompany the letters to
the post office or mail drop. First class mail should be used to
facilitate response time.
¯ Special handling procedures should be considered for
international mail, for example, both a telex request and a
confirmation letter may be appropriate. Also, including one or two
international reply coupons (purchased at the post office) with
confirmations may increase the response rate. Customers can use
the coupons to purchase stamps in their own currency.
¯ If the auditor, based on his or her consideration of fraud risk
factors, decides to modify procedures related to accounts receivable
balances, the auditor should consider contacting customers by
telephone in addition to sending written confirmations. In addition,
the auditor may consider confirming additional information with
the customer. For example, relevant contract terms such as
acceptance criteria, delivery and payment terms, the absence of
future or continuing client obligations, the right to return product,
 guaranteed resale amounts, and cancellation and refund provisions
may also be confirmed. The auditor should also consider
confirming that the client and customer do not have any side
agreements in addition to stated contract terms.
¯ Accounts receivable often represents one of the best
opportunities to use data extraction software in an audit. Both the
auditor and the client may save significant time by automating the
accounts receivable confirmation process. Data extraction software
also can be used to divide the population of accounts into natural
groups (see Step 2), review subsequent cash collections and test the
accounts receivable aging (see Step 7), and test sales cutoff (see
Step 11).
A, E, 4. For the remaining balance that is not confirmed 100% in
[B], [C] Step 3, determine if a sample of the accounts making up the
balance should be selected for confirmation.
a. If sampling is appropriate, document the sampling selection
process.
b. Repeat program Steps 3a through 3h on accounts being
sampled.
Practical Considerations:

¯ Review Chapters 4 and 7 before performing a sampling

application and determining a sample size. In many situations,
sampling the remaining balance may not be necessary. See CX-7a
for a worksheet to determine the extent of procedures to apply to
the remaining balance.
¯ If sampling is used, consider confirming invoices instead of
account balances.
¯ The “Sampling Planning and Evaluation Form—Substantive
Tests,” (CX-7b) can be used to document the sampling process.
A, E, 5. For significant employee receivables, notes receivable, or
[B], [C] other receivables not on the aged trial balance, consider mailing
positive confirmations. Retain copies of all confirmations in the
workpapers.
Practical Consideration:

¯ Normally these receivables are not material, and audit

procedures are not warranted. If the owner/manager has a large
payable to the company, the auditor should evaluate whether the
receivable actually represents salary or a dividend. Confirmation of
a loan to an owner/manager can also be obtained in the
management representation letter if the owner/manager is the party
signing the representation letter.
A, E, 6. Process the confirmation replies:
[B], [C]
a. Reconcile differences reported by customers on
confirmation replies.
Practical Considerations:

¯ In most instances, it is efficient to have the client’s personnel

perform the initial reconciliation of the confirmation replies. In that
case, a copy of the confirmation reply should be provided to the
client with instructions on the format they should use to reconcile
the customer’s balance to the client’s balance. (See CX-21 for a
suggested workpaper format that may be used.) If practical, client
personnel should be requested to attach supporting documentation,
such as validated deposit slips, invoices, and shipping
documentation, to each reconciliation to facilitate examination by
the auditor.
¯ Respondents sometimes use nontraditional means such as fax
machines or e-mail to answer confirmation requests. In those cases,
the auditor should consider the following additional steps:
¯¯ Verifying the source and content of the response over the
telephone and documenting in the workpapers that this was done.
¯¯ Requesting that the respondent mail the original confirmation
directly to the auditor.
b. Perform alternative procedures for those customers that do
not respond.
Practical Considerations:

¯ Generally, the following approach can be used to perform

alternative procedures for each nonreply:
¯¯ First, examine cash receipts subsequent to the confirmation
date.
¯¯ If a portion of the balance has not been collected, examine
sales invoices and corresponding shipping documents.
The auditor may also examine shipping documents on the
subsequently collected portion if additional evidence about sales
cutoff is needed.
¯ If practical, alternative procedures should be performed on all
nonreplies. However, if a nonreply will be extremely time-
consuming to test, consider classifying the entire nonreply
customer balance as a misstatement. In that case, if the nonreply
was part of a sampling application, the misstatement should be
projected to the population (see Step 6d). Then, if the resulting
projected misstatement in the total account is acceptable, additional
 testing is not necessary.
c. For groups confirmed 100%, summarize the results of
confirmation procedures and indicate the total accounts and
balances confirmed without exception, confirmations reconciled,
nonreplies with alternative procedures performed, and
confirmations and nonreplies with misstatements.
d. For accounts receivable groups that were sampled,
summarize and evaluate the sample results and project the
misstatements in the strata.
e. Based on results of confirmation procedures, determine if
additional confirmation or alternative procedures are warranted on
untested customer balances.
Practical Considerations:

¯ The “Confirmation Summary Form” (CX-8) can be used to

summarize the confirmation results for sampling or nonsampling
applications.
¯ The “Sampling Planning and Evaluation Form—Substantive
Tests” (CX-7b) can be used to summarize, as well as evaluate, the
results for sampling applications.
C 7. Test the adequacy of the allowance for doubtful accounts:
a. Have the client post subsequent cash collections to your
copy of the aged trial balance obtained in Step 1.
b. Test the client’s subsequent collections on major account
balances by examining deposit slips and remittance advices.
Document the account balances selected for testing.
c. If uncollected accounts are significant, test the aging of the
remaining accounts. (It is advisable to use original sales documents
to test the propriety of aging.)
d. If practical, for each material past due account, inspect
credit files, review customer correspondence, or discuss the status
of collection with the client. Identify potentially doubtful accounts.
e. Inquire if there are collection problems likely to occur with
accounts that are presently classified as current.
f. If you become aware that individual accounts have been
converted to notes, determine if they should be classified as
noncurrent assets.
g. Relate your findings in Steps 7a to 7f to the allowance for
doubtful accounts and evaluate its adequacy. If meaningful,
consider computing prior year bad debt statistics and prior year
collection statistics.
h. If the company uses the direct write-off method, evaluate
 the exposure that significant uncollectible accounts remain in
accounts receivable.
Practical Consideration:

¯ The direct write-off method is not GAAP. However, depending

on the materiality of the allowance and write-offs during the
period, it may approximate GAAP.
i. Consider the collectibility of significant employee
receivables, notes receivable, or other receivables not on the aged
trial balance.
Practical Considerations:

¯ Comments made by client personnel should not be taken at

face value without other evidence to support the accuracy of client
comments.
¯ Other considerations or approaches that you may wish to use
are:
¯¯ Use alternative approaches to develop an independent
estimate.
¯¯ Compare the allowance with actual results after the balance
sheet date.
¯¯ Consider the client’s process for estimating the allowance,
including the qualifications and experience of the person who
determines the amount of the allowance account.
¯¯ Determine whether the estimate of the allowance balance was
subjected to management review.
¯¯ Determine what steps the company takes to identify any
unusual variations and the reasons therefor.
¯ Statistics regarding bad debt history may be meaningful and
can be maintained on a form similar to the “Accounts Receivable
Statistics Form,” CX-9.
¯ In evaluating the allowance for doubtful accounts, it may be
helpful to determine a range of amounts within which the
company’s bad debt allowance would be acceptable. If the
company’s balance does not fall in this acceptable range, the
potential error would be the difference between the client’s amount
and the closest amount in the acceptable range.
¯ For significant delinquent balances, it may be necessary to
evaluate the creditworthiness of the debtor and the value of any
collateral pledged to secure payment of the receivable.
D, [A] 8. Based on a review of confirmation replies from financial
institutions, loan agreements, minutes, inquiry with the
 owner/manager, and work performed in other audit areas,
determine if there are pledged, discounted, or assigned receivables.
Practical Considerations:

¯ If the above procedures do not indicate the existence of such

receivables, consider documenting this by stating “none noted”
under the index column of this program.
¯ If existence of such receivables was noted, briefly summarize
the financial statement disclosure in a memo or cross-reference to
other audit workpapers where such information is summarized.
D, E 9. Based on work performed in previous steps and knowledge
obtained in other audit areas, determine that the following accounts
are identified for separate classification in the balance sheet.
a. Large credit balances that should be classified as accounts
payable.
b. Related party receivables.
c. Material employee receivables.
d. Material notes receivable.
e. Noncurrent receivables that should be reclassified.
B 10. Evaluate whether evidence obtained in the preceding steps
and from procedures in the audit of revenue is adequate to support
the completeness assertion, i.e., whether all transactions are
included in revenue and related accounts receivable balances.
Practical Considerations:

¯ The procedures do not have to be complex or time-consuming.

Evidence about completeness can be obtained by inquiry,
observation, analytical procedures, tests of transactions, and
management’s representations. See Chapters 3 and 7 for additional
discussion of these procedures.
¯ The documentation of this step can be a brief memo or note in
the workpapers. It should correlate the work performed in other
areas such as analytical predictive tests in the revenue area.
A, [B] 11. Perform the following analytical procedures. For any
significant differences noted, investigate the nature and cause of the
differences and consider whether additional procedures are needed
to test sales cutoff:
a. Compare sales for the last month of the fiscal year to sales
for the rest of the year and the first month after year end.
b. Compare monthly sales returns and credit memos for the
last few months of the fiscal year to the first few months following
year end.
 Practical Considerations:

¯ Basic accounts receivable confirmation procedures and the

preceding analytical procedures are usually adequate to test the
sales cutoff. However, the following circumstances warrant
consideration of performing additional cutoff tests:
¯¯ When accounts receivable are confirmed as of an interim
date.
¯¯ When large quantities of merchandise awaiting shipment are
noted during the year-end inventory observation.
¯¯ When there has been a large increase in sales during the last
month of the year under audit or in the first month of the new year.
¯¯ When there has been a large increase in sales returns or credit
memos in the first few months after year end.
¯¯ When the auditor’s knowledge of the client and/or
understanding of internal control indicates a high risk of material
misstatement of sales cutoff.
¯ When an analytical procedure is used as the principal
substantive test of a significant financial statement assertion, SAS
No. 56, Analytical Procedures, as amended by SAS No. 96, Audit
Documentation, requires the auditor to document (1) the
expectation and the factors considered in its development (unless
readily determinable from the work performed), (2) the results of
the comparison between the expectation and recorded amounts, and
(3) any additional procedures performed in response to significant
unexpected differences and the results of those procedures. SAS
No. 96 is effective for audits of financial statements for periods
beginning on or after May 15, 2002, with early application
permitted.
* 12. Consider the need to apply one or more additional
procedures. The decision to apply additional procedures should be
based on a consideration of whether information obtained or
misstatements detected by performing substantive tests or from
other sources during the audit alter your judgment about the need to
obtain a further understanding of control activities, the assessed
level of risk of material misstatements (whether caused by error or
fraud), and on an evaluation of whether the basic procedures have
been sufficient to achieve the audit objectives. Attach audit
program sheets to document additional procedures.
Practical Considerations:

¯ Certain common additional procedures relating to the

 following topics are illustrated following this program:

¯¯ Year-end cutoff.

¯¯ Write-offs.

¯¯ Imputed interest.

¯¯ Interest on notes receivable.

¯¯ Related party receivables.

¯¯ Employee travel advances.

¯¯ Analytical procedures.

¯¯ Fair value disclosures.

¯¯ Noncurrent notes and accounts receivable.

¯¯ Collateralized accounts receivable.

¯¯ Accounts receivable confirmed at interim date.

¯¯ Transfers of receivables.

¯¯ Cash receipts.
¯ Practitioners may refer to PPC’s Guide to Fraud Investigations
for more extensive fraud detection procedures if it is suspected that
the financial statements are materially misstated due to fraud.
* 13. Consider whether procedures performed are adequate to
respond to identified fraud risk factors. If fraud risk factors or other
conditions are identified that require an additional audit response,
consider those risk factors or conditions and the auditor’s response
in connection with the performance of Step 11 in AP-1b.
Practical Consideration:

¯ Specific responses to identified fraud risk factors are addressed

in individual audit programs. In connection with evaluation and
other completion procedures in AP-1b, the auditor considers the
need to perform additional procedures based on the results of
procedures performed in the individual audit programs and the
cumulative knowledge gained from performing those procedures.
* 14. Consider whether the results of audit procedures indicate
reportable conditions in internal control and, if so, add to the memo
of points for the communication of reportable conditions. (See
section 1504 for examples of reportable conditions, and see CX-18
for a worksheet that can be used to document the points as they are
encountered during the audit.)
CONCLUSION

We have performed procedures sufficient to achieve the audit

objectives for accounts receivable, and the results of these
procedures are adequately documented in the accompanying
workpapers. (If you are unable to conclude on any objective,
prepare a memo documenting your reason.)

⇒Additional Audit Procedures for Accounts Receivable

Instructions: Additional procedures will occasionally be necessary on some small
business engagements. The following listing, although not all-inclusive, represents
common additional procedures and their related objectives.

Year-end Cutoff
A, [B] Test the year-end cutoff procedures for sales to determine if
receivables are recorded in the appropriate period.
a. Scan the sales journals for one month before and after year
end. Investigate any unusual entries.

b. Review the journal for sales returns and credit memos for
two months before and after year end. Investigate any unusual
entries.

c. Trace the shipping documents for the last five shipments of

the year and the first five shipments after year end to the sales
journal to determine whether they were recorded in the proper
 period.
Practical Considerations:

¯ Normally, the shipping documents will have already been

identified at the year-end inventory observation. (See basic
procedure 6a at AP-5.)
¯ Basic accounts receivable confirmation procedures and the
preceding analytical procedures are usually adequate to test the
sales cutoff. However, the following circumstances warrant
consideration of performing additional cutoff tests:
¯¯ When accounts receivable are confirmed as of an interim
date.
¯¯ When large quantities of merchandise awaiting shipment are
noted during the year-end inventory observation.
¯¯ When there has been a large increase in sales during the last
month of the year under audit or in the first month of the new year.
¯¯ When there has been a large increase in sales returns or credit
memos in the first few months after year end.
¯¯ When the auditor’s knowledge of the client and/or
understanding of internal control indicates a high risk of material
misstatement of sales cutoff.

Write-offs
C Select individual accounts that were written off during the audit
period. Determine that the entries were properly approved by the
owner/manager. Document the items tested.
Practical Consideration:

¯ This is a fraud test and should not be performed unless the

auditor suspects that improprieties have occurred.

Imputed Interest
A, E Review accounts and notes receivable to determine if any interest
should be imputed for significant balances that are due in excess of
one year from the balance sheet date. Also consider proper balance
sheet classification of such receivables.
Practical Consideration:

¯ Extended term accounts receivable are rare but can arise when
a company establishes payment terms for its trade accounts
 receivable based on a poor economy or difficulty with some key
customers. Normally, this type of interest should not be accrued,
but instead be recognized on a cash basis.

Interest on Notes Receivable

A, E For significant notes receivable, test the reasonableness of interest
earned and any prepaid or accrued interest receivable.

Related Party Receivables

D, [A] If related party receivables are material, prepare or obtain an
analysis of advances to directors, officers, employees, stockholders,
and other affiliated parties and perform the following steps:
a. Recompute the total balance and determine that it agrees
with the balance in the general ledger or the detailed trial balance.

b. Review the list for potential problem accounts or large

amounts.

c. Identify the purpose for advances and their potential

collectibility. Determine if such advances should be reflected as
dividends or salary.

d. If the balances are significant, consider confirmation of

several selected individual balances with the employees or
affiliated parties and reconcile replies. Retain copies of all
confirmations in the workpapers.
e. Determine that such advances have been properly approved
by individuals appropriate under the bylaws of the company.

f. Determine the nature of any accounts receivable from such

parties that were written off during the audit period but
subsequently reinstated to the general ledger.
Practical Consideration:

¯ These steps should be coordinated with the related party

procedures in the general program.

Employee Travel Advances

A, [D] Obtain or prepare a schedule of the detailed balances included in
employee travel advances and perform the following steps:
a. Recalculate the schedule to determine the clerical accuracy
and determine that the total balance agrees with the general ledger.

b. Compare individual information with the source records on

a test basis. Document the items tested.
c. Confirm account balances with individual employees if the
total amount is significant (this is very rarely the case) and
reconcile replies. Retain copies of all confirmations in the
workpapers.

d. Determine whether there is a proper cutoff of expense

advances with the last payroll for year end.
Practical Consideration:

¯ In most cases, small businesses do not generate a significant

amount of employee advances. These advances should normally be
cleared on a regular basis and, thus, should not grow to significant
amounts.

Analytical Procedures
[A],[B], Apply analytical procedures to accounts receivable by determining
[C] the following and comparing to percentages maintained in the
permanent audit file:
a. Trade receivables divided by current assets.

b. Trade receivables divided by total assets.

c. Trade receivables divided by net worth.

d. Net sales divided by trade receivables.

e. Trade receivables divided by (net sales divided by 360).

f. Determine the cause of any significant fluctuations in these
percentages.
Practical Consideration:

¯ Normally, these analytical procedures should only be

performed when the auditor feels additional evidence is necessary
beyond that obtained by basic procedures identified earlier in the
program.
 Fair Value Disclosures
E Obtain information about the fair values of financial instruments
(e.g., trade accounts receivable and notes receivable) for disclosure
in the financial statements.
Practical Considerations:

¯ SFAS No. 126, Exemption from Certain Required Disclosures

about Financial Instruments for Certain Nonpublic Entities: An
Amendment of SFAS No. 107, makes SFAS No. 107’s disclosures
about the fair value of financial instruments optional for companies
that meet the following criteria:
¯¯ The company is a nonpublic company.

¯¯ The company’s total assets are less than $100 million on the
date of the financial statements.

¯¯ The company has no instrument that, in whole or in part, is

accounted for as a derivative instrument under SFAS No. 133
during the reporting period.
¯ Unless the client provides extended repayment terms (e.g., in
excess of 90 days), the carrying amount of accounts receivable will
ordinarily approximate their fair value and no disclosure is required
by SFAS No. 107.

¯ The carrying amount of notes receivable will ordinarily

approximate fair value. However, if the interest rate on the note is
significantly more or less than current market rates, fair value can
be determined by discounting future cash flows at an appropriate
rate, considering the relative risk associated with the note. SFAS
No. 107 indicates that one option is for the company to use the rate
at which the same loan would be made under current conditions.
¯ Fair value may be affected by the risk that the customer or
borrower will default. If the risk of default is remote, it is generally
possible to value the receivable by discounting future cash flows. If
the risk of default is probable, fair value can be determined by
valuing the collateral and any secondary sources of repayment
(such as payments made by the business owner). However, if the
risk of default falls somewhere between remote and probable, fair
value estimates will require significant judgment.
¯ Interpretation No. 1 of SAS No. 57, Auditing Accounting
Estimates (AU 9342), addresses auditing the client’s fair value
estimates for disclosures required by SFAS No. 107. The
Interpretation requires that the auditor obtain sufficient competent
 evidence to provide reasonable assurance that:
¯¯ Valuation principles are in accordance with SFAS No. 107,
consistently applied, and supported by underlying documentation.
¯¯ The method of estimation and significant assumptions used
are properly disclosed.
¯ Paragraph 60 of SFAS No. 107 allows companies to use
simplified assumptions to estimate fair value of financial
instruments. Consequently, it is important that the methods and
significant assumptions used in the estimates are disclosed.
¯ If a fair value estimate is based on the work of an outside
specialist (e.g., an appraiser), the requirements of SAS No. 73,
Using the Work of a Specialist, should be followed. The additional
procedures to AP-1 contain audit procedures regarding using the
work of a specialist.
¯ AU 9342 provides additional guidance for situations in which
the client chooses to provide voluntary fair value information in
addition to that required by SFAS No. 107.
¯ SFAS No. 107 does not require that fair values of financial
instruments be estimated if it is not practicable, or cost effective, to
develop the estimates. The decision of whether it is practicable
should consider such things as the importance of the financial
instrument to the client’s business activities and the materiality of
the carrying amount of the financial instrument to the financial
statements.
¯ When it is not practicable to estimate the fair value of a
financial instrument, disclosure must be made of:
¯¯ Information pertinent to estimating the fair value of the
financial instrument.

¯¯ The reasons why it is not practicable to estimate fair value.

Noncurrent Notes and Accounts Receivable

E For notes and accounts receivable with maturities greater than one
year, perform the following procedures:

a. Evaluate whether the interest and contractual principal

payments will be collected in accordance with their contractual
terms.

b. If either interest or principal payments will not be collected

in accordance with their contractual terms, determine whether an
allowance for credit loss has been computed using one of the
following methods:
 (1) The present value of expected future cash flows
discounted at the receivable’s effective interest rate.

(2) The receivable’s observable market price.

(3) The fair value of the collateral (if the receivable is

collateral dependent).

Collateralized Accounts Receivable

C If collateralized accounts receivable are significant, examine
collateral for existence, ownership, and its fair value.
Practical Considerations:

¯ Some evidence of ownership includes a bill of sale, a title, a

deed, or a mortgage.
¯ Depending on the type of collateral being evaluated, the
auditor may evaluate the reasonableness of the client’s estimate of
the fair value of the collateral by using a security or commodity
quotation, appraisal, assayer’s or other expert’s report, blue book,
or other general source.

Accounts Receivable Confirmed at Interim Date

A, [B], If accounts receivable were confirmed at an interim date, perform
[C] the following steps:
a. Obtain a detailed aged accounts receivable trial balance at
the balance sheet date and perform the following:
(1) Obtain or prepare a reconciliation of the trial balance to
the general ledger control account. Examine support for significant
reconciling items.
(2) Compare trial balance totals between the balance sheet
date and the interim date. Investigate significant variations.
(3) Identify any significant changes in the aging of accounts
receivable.
b. Scan receivables activity in the accounting records during
the period from the interim date to the balance sheet date.
Investigate and explain the nature and origin of any unusual entries.

c. Perform a test of sales cutoff at the balance sheet date.

Practical Considerations:

¯ In most small businesses, it is more efficient to confirm

 accounts receivable as of the balance sheet date to avoid incurring
the additional time necessary to bring the accounts receivable
balances forward to year end. Section 207 discusses factors to
consider when deciding whether to confirm accounts receivable as
of an interim date.

¯ If the results of the rollforward procedures are unsatisfactory,

consider the need to confirm accounts receivable as of the balance
sheet date.

Transfers of Receivables
D, E If the company has transferred receivables to a third party,
determine whether the transaction has been accounted for in
accordance with SFAS No. 140.
Practical Considerations:

¯ Section 302 of PPC’s Guide to Preparing Financial Statements

discusses accounting for transfers of receivables in accordance with
SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities.
¯ An auditing interpretation of SAS No. 73 (AU 336), Using the
Work of a Specialist, titled The Use of Legal Interpretations as
Evidential Matter to Support Management’s Assertion That a
Transfer of Financial Assets Has Met the Isolation Criterion in
Paragraph 9(a) of Financial Accounting Standards Board
Statement No. 140, provides guidance to auditors about obtaining
evidential matter to determine the proper accounting treatment
under SFAS No. 140.

Cash Receipts
* If the auditor, based on his or her consideration of fraud risk
factors, decides to modify procedures related to customer cash
receipts, consider performing a proof of cash (see additional
procedures at AP-2). In addition, consider verifying the following:
a. The dates of cash receipts and deposit tickets are identical.
b. The total amounts on the daily cash receipts list and daily
deposit slips agree.
c. The customer’s name and deposit amounts should be the
same on the daily cash receipts journal and the subsidiary ledger.
d. Deposit slip totals are accurate.
 e. Review customer complaints.
f. Search for write-offs that are unusual, such as write-offs of
balances due from continuing customers.
g. Review credit memos.
Practical Consideration:

¯ Practitioners may refer to PPC’s Guide to Fraud Investigations

for more extensive fraud detection procedures if it is suspected that
the financial statements are materially misstated due to fraud.

⇒Additional Audit Procedures for Accounts

Receivable Beginning Balance in Initial Audit
Company Balance Sheet Date

Audit N/A Workpaper

Objectives Performed Index
Audit Procedures for Consideration by
Instructions: Additional procedures will be necessary in an
initial audit. These procedures are applied to opening balances and
differ depending on whether you are relying on your review of a
predecessor’s work or placing no reliance on a predecessor’s audit.
(Section 1803 discusses considerations when replacing a
predecessor auditor, including a discussion of what the term
reliance means when used in this program.) These procedures may
be applied in conjunction with the basic procedures applied to the
ending balance. The asterisks preceding the procedures indicate
that they are an intermediate step in achieving audit objectives for
the ending balance.
* 1. If a predecessor’s audit of the prior period’s financial
statements is to be relied on:
a. Review the predecessor’s workpapers containing the aged
trial balance of receivables, including the posting of subsequent
cash collections and the summary of confirmation results; consider
the adequacy of confirmation coverage and results.
b. Review the predecessor’s workpapers on the adequacy of
the allowance for doubtful accounts; consider the adequacy of
procedures and the reasonableness of the conclusion on the
balance. Note the method of determining the balance and compare
to the method used in the current period.
c. Identify significant noncash credits to receivables during
 the first three months of the current period and consider whether
they relate to the prior period. Document any items tested.
* 2. If no reliance on a predecessor’s audit is planned or
possible:
a. Scan the aged trial balance of opening accounts receivable,
foot the schedule, and trace the total to the general ledger control
account.
b. Scan the general ledger control account for significant
noncash credits (write-offs or sales returns and allowances) for the
first three months of the current period; consider whether they
relate to the prior period. Document any items tested.
c. Compare cash collections in the first two months of the
current period with the prior period accounts receivable balance.
d. Compare sales in the first month of the current period with
sales in the last month of the prior period; consider the
reasonableness of the sales cutoff.
e. Obtain and scan a summary of the activity in the allowance
for doubtful accounts for the prior period; note the method of
determining the balance and compare to the method used in the
current period.
f. Compare the following ratios for the current period to the
same ratios in the two prior periods.
(1) Age categories to receivables.
(2) Receivables to sales.
(3) Allowance for doubtful accounts to receivables and sales.
Practical Considerations:
¯ Watch for major customers on the prior period trial balance
not on the current period closing trial balance, unusually large
noncash credits, and indications of improper cutoff.
¯ See the practical considerations for basic procedures 1 and 7.