Auditing Procedures - Accounts Receivable

A. Existence/occurrence - Are accounts receivable valid? Did sales actually

occur?
1. Confirm receivables (SAS 67). Best evidence when sent at year end
rather than interim.
a. Use confirmations unless: 1. receivables are immaterial 2.
confirming would not provide useful information 3. control risk is so low that other
procedures will reduce audit risk to acceptable level.
b. Types of confirmations: (common to use a combination of positive
and negative)
1. positive: sent to customer of client by auditor requesting a
response directly as to whether the stated amount owed is correct or incorrect.
Provides reliable evidence. Costly.
2. negative: sent to customer of client by auditor requesting a
response only if the customer disagrees with the amount stated on the confirmation.
Less reliable information than positive. Less expensive than positive. Auditor can
use negative confirmation only in the following circumstances: receivables is
comprised of a large number of small accounts; inherent and control risk is very low;
no reason to expect customers not to respond to the request.
c. If not confirming receivables, auditor must document how this
decision was made.
d.

Confirming is good procedure to detect lapping.

e. Confirming may detect improper sales cutoff. (customers show

smaller balances).
f. When customers do not respond to requests, other procedures should
be employed, such as examining subsequent cash receipts, shipping documents, sales
invoices, bank deposits.

2. Vouch receivables to shipping documents.

3. Vouch sample of recorded sales transactions to customer orders and shipping
documents. Focus on large or unusual sales.
B. Completeness. Do the balances of sales and receivables contain all
transactions for the period?
1.

Reconcile sub ledger to control account for receivables.

2. Sales cutoff test. Trace shipping documents immediately prior and just after
accounting period to the accounting records. Focus on FOB shipping point and FOB
destination.
3. Cash receipts cutoff test. Trace daily remittance of payments to accounts
receivable credits.
4. Trace shipping documents to sales invoices and accounting entries to
determine if sales were recorded appropriately.
5. Account for numerical of numbered documents.
6. Apply analytical procedures. Compare ratios of this period to prior periods,
budgets, and industry averages.
C. Rights and Obligations. Does the client company have the right to collect the
receivables?
1.

Inquire of management. Discuss factoring and pledging.

2. Track cash receipts to determine if collections match deposits in the

company's bank accounts.
3. Examine return policy. Evaluate expected/actual returns before and after
year-end. Evaluate past returns at this time period.
D. Valuation/Allocation. Are receivables valued at GAAP, i.e., net realizable
value?

1.

Perform or evaluate clients aging schedule.

2. Trace cash receipts early in subsequent period. Cash receipts in subsequent

period provide best evidence of collectibility.
3.

Evaluate delinquent customers credit histories.

E. Presentation/Disclosure. Are sales and receivables appropriately presented and

is their appropriate note disclosures?
1.

Evaluate the balance sheet and income statement for proper classification.

2. Read footnotes. Disclosures about factoring and pledging and related party
transactions.
3. Obtain and evaluate the management representation letter concerning the
revenue/receipt cycle.
III.

Other Related Revenue/Receipt Accounts.

A. Sales Returns and Allowances. Were returns properly authorized? Were goods
returned? Auditor examines receiving reports, credit memos, and entries in the
accounting records.
B. Bad Debt Expense. Are writeoffs properly authorized? Evaluate allowance
account and estimating procedures for determining size of allowance. Evaluate
accounts that have been written off and examine aging schedule for potential
additional writeoffs. Mail confirmation requests to customers that have been written
off (there should not be a response).