r g - Substantive Test of Receivables and Sales ner 9 — el TER 9 oT ANTIVE TEST OF RECEIVABLES AND SALES $ pIcOVERVIEW: ter discusses the audit of receivables and sales, its objectives and qhis charisias well as the management assertions relating to receivables rocedures Sid sales BJECTIVES: ean ac ahapiee you should be bie) ater entity the audit objectives for receivables, sales and related accounts. 1 peeibe the primary substantive audit procedures for receivables, 2 and related accounts. 4, Identify assertions addressed by audit procedures for receivables, sales * and related accounts. © andrelated accounts Introduction The audit of receivables and revenue (e.g, sales) represents significant audit risk because: (a) many incidences of financial statement fraud have involved the overstatement of receivables and revenue; (b) revenue recognition may be based on complex accounting rules; and (9 receivables and revenue are usually subject to valuation using significant accounting estimates. sales Itis also noteworthy that under PSA 240, the auditor shall, based on a presumption that there are risks of fraud in revenue recognition, evaluate which types of revenue, revenue transactions or assertions give rise to such "sks. If the auditor has concluded that this presumption is not applicable, the auditor shall document the reasons for that conclusion. Companies should establish effective high-level controls over the financial eporting of these accounts, including (@) an audit committee to oversee the reliability of reporting of revenue; an internal audit department to monitor compliance with other Tevenue cycle controls; J human resource policies and practices to ensure that competent Personnel are involved in determining revenue and receivables estimates; and SHective monitoring policies, and procedures. In addition, a sound ‘Ccounting system’ and effective control activities should be “stablished for the revenue cycle. 223 Bee Test of Receivables and Sales tive ter 9 - Substal cha ationship between revenue and receivable, the > the close rel / Because of Uonsigered June, The determination ofthe amount of yy, ™® can be be! for a particular period is integrally related to a num eye to be i including sales and accounts rece a ent teen, and accounts recelvable, Service revenue, defer rec revenues and cash 4 it Objectives : : nies parte accounts receivable and sales, the principal objective for th 5 stantive tests is to determine the following: Existence or ‘All receivables on the SFP are authentic claims of] Occurrence the entity and all sales have really occurred | pertain to the entity. | Completeness ‘All authentic claims of the entity for amouns receivable are included on the SFP and all sales have been included in the SCI. Cut-off Sales have been recorded in the proper accounting | eriod. Valuation and Receivables are carried at their net realizable | Allocation (collectable) value (i.e., the gross receivables are properly stated with appropriate allowances provided for doubtful accounts, discounts, returns, warranties and similar items). ‘Accuracy Sales have been accurately recorded in the SCI. Rights and The entity owns, or has a legal right to all the Obligations receivables on the SFP at the reporting date. Presentation and Receivables and sales are properly classified, | Disclosure described, and disclosed in the financial & statements, including notes, in accordance with | Classification PERS. Pledged, discounted, or assigned accounts receivable are properly disclosed. Related pa Audit Procedures for Receivables and Sales The auditor's primary substantive procedures for recei sales transactions will typically include the following: 1. Reconciliation of Subsidiary Ledger (SL) with General Ledger (GL): 2. Confirming receivables and reviewing subsequent cash receipts: 3. Test of details for occurrence, accuracy and classification of sales 4. Analyzing notes receivable and related interest; ivable balance and 224g - Substantive Test of Receivables and Sales 9 ating the adequacy of the allowance for doubtful accounts, ‘uding the appropriateness of the methodology used to calculate e; she alloy accounts receivable and sales cutoff Perr details for completeness of sales; Arecking the appropriate valuation of accounts receivables bon ninated in foreign currencies; investigating any transactions with or related party receivables; analyzing credit balances and unusual items; i" ascertaining whether any receivables have been pledged or assigned; 12. and ming analytical procedures Audit procedures presented in this textbook merely illustrate typical audit cedures (ie, primary substantive procedures) for audits of merchandising nd manufacturing entities. It is also primarily designed for audits of ration; however, some discussions are made for partnership and sole proprietorship businesses. In actual practice, audit programs must be tailored tn each client's risk and internal control. The audit procedures comprising audit programs may substantially vary from engagement to the next. Asertons mentioned in this textbook relate to primary assertion addressed by the audit procedures discussed. However, some other assertions may also be addressed. Reconciliation of Subsidiary Ledger with General Ledger Primary Audit ] First step in the audit of receivable is to obtain an aged Objectives: | trial balance of receivable. After obtaining an aged trial campletness | balance, the auditor should test the clerical accuracy (eg Lewation __J" footing, cross-footing) of the schedule and briefly inquire of management as to steps taken to ensure the trial balance is complete (ie. ‘hatall receivables due to the company are included on the trial balance). the client processes their transaction manually, the auditor then would obtain and review the reconciliation prepared by the entity between the receivables sub-ledger and the control account (ie., general ledger), and investigate reconciling items, particularly any unusual non-standard journal entries, {the client uses automated processing, the auditor would request the client pefenerate the subsidiary ledger of receivable and then compare it with the alance in the general ledger. 225g - Substantive Test of Receivables and Sales Chapter, bsequent Cash Receivables & Review of Subseqi sh Re confirma st The primary audit procedure to verify the exi uation of receivable is through co; ceipt istence a Ind nfitmatio, gross va xistence Note that confirmation should only be performed n@™ Occurrence the auditor has already reconciled the Subsidiary | — Valuation with the general ledger. Ordinarily, confirmation ig c® ‘Accuracy Used unless: Rights Receivables are immaterial; 5 Confirming would not provide useful information; and F Control risk is so low that other procedures will reduce audit ris y an acceptable level. in accordance with PSA 505 Revised and Redrafted, when using confirmation, the auditor can use either the positive or negative confirmation, or a combination of the two methods to produce more effective procedure. Positive Confirmation. It is sent to customer of the client by the auditor requesting a response directly as to whether the stated amount owed is correct or incorrect, or to request the customer to provide specific information, such as their account balance with the entity (referred to asa blank form). This type of confirmation is specifically used when: 1. The information available to corroborate management's assertion(s) is only available outside the entity; 2. The entity's information systems and internal controls are unreliable or ineffective (the assessed level of the risk of material misstatement is HIGH); 3. Specific fraud risk factors, such as risk of management override of internal controls, prevent the auditor from relying on evidence from the entity; and 4. The account balances comprise of small number of large accounts. Positive confirmation is considered to provide more reliable audit evidence. Negative confirmation. It is sent to customer of the client by auditor requesting a response only if the customer disagrees with the amount stated on the confirmation. This : ; ng : e e followi encanta: type of confirmation is used in th 1. The auditor has no reas confirmation re 2. The auditor ha: and has obtain Operating effect 3. Very few or no ‘on to believe that recipients of negati® ‘quests will disregard such confirmation requests: S assessed the risk of material misstatement as LOW ed sufficient appropriate audit evidence regarding t* tiveness of controls relevant to the assertion; exceptions expected; and 226ry 9 substantive Test of Receivables and Sales ‘ceivables comprise a large number of small, homogenous re 4 mount palances, transactions or conditions, rmation provides audit evidence est consitive confirmation, Non-response cee teeter compel ee that the customer agrees with the information “in the eit ation request or the er s just ignore the confirmation letter, oe 4 customers do eae ae other procedures should be we yd, such as exam 1g subsequent cash receipts, shipping documents ene invorees though the main objective of confirmation is to verify the existence of anteush aoles, confirmation also can be used to detect lapping and sales cutoff (such as those customers that show smaller balances). bier Considerations When Using Confirmation " 1 ‘The confirmation should be prepared by the audit client and signed by the appropriate management; ‘The confirmation request should describe that it is not a request for payment, but merely to confirm the account; The confirmation request should be sent to the client’s customer under the control of the auditor; The auditor may include in the confirmation request the details of the transactions, such as customer's purchase order numbers to improve the response rate; 5, The confirmation request should be mailed in envelopes bearing the audit firm's return address to ensure that all confirmation requests that are undeliverable by the post office are returned directly to the audit firm; and 6. Receipt of reply to confirmation request s of the auditor. 2 3. hould be under the control Discrepancies in Customers’ Replies The auditor should resolve differences reported by client's customers Majority of such reported discrepancies arise because of normal lags and in- transit items (e.g, payments made but not received, goods shipped but not Teceived), disputed sales terms, credits allowed but not reflected in the records, and clerical errors. Alternative Audit Procedures for Non-responses flew Using positive confirmation request, the auditor should generally low up through email or a telephone call to illicit replies. Traditionally, Second or even third confirmation request can be used but nowadays, Sending second or third confirmation is impractical because the auditor <0 rack the status ot location of the request via the website of the courier. en replies are still not received, the auditor should apply the following 227Chapter 9 - Substantive Test of Receivables and Sales dures (unless the amount of nonresponse alternative proce’ 2 an is and there are no unusual characteristics related to the nonrespone eifan 4, Examine ‘of subsequent cash receipts in payment of receivabie : : les, 2. Examine of charges and credits to accounts receivables, and 3. Examine of related shipping documents, purchase orders invoices for the sales transactions making up the receivable OF Saleg Management's Refusal to Allow the Auditor to Send a Confirmation Avfelusal by management to allow the auditor to send a vr Regues eT eid " request is a limitation (ie, scope limitation) on the audit engetn auditor may wish to obtain. The auditor is therefore required to in a the reas fo the reasons for the limitation. A common reason advanced jg existence of a legal dispute or ongoing negotiation with the fees confirming party, the resolution of which may be affected by an ini confirmation request. The auditor is required to seek audit evidence ne the validity and reasonableness of the reasons because of the risk tht management may be attempting to deny the auditor access to audit evidence that may reveal fraud or error. Intercompany receivable intercompany receivable can be verified by sending confirmation to the client's related party. If the auditor also audits that related party, the auditor may simply cross-examine the records of the related parties. Kindly refer to Exhibit 2 at the end of this chapter for sample Positive Formof Receivable Confirmation. Test of Details for Occurrence, Accuracy and Classification of Sales To satisfy the objectives of the auditor on the occurrence, accuracy and classification of sales, the auditor commonly performs test of details by selecting items from the population of recorded sales during the audit period. Ths test is intended to verify if the amounts recognized revenue really did occur, are accurate and are appropriately classified Occurrence Accuracy Classific ‘Audit procedures to perform this test may include the following: os 1. Obtain the related sales information (eg, subsidiary ledger of sales transaction details) for the period under audit. te ar 2, Using the related sales information as population, select iter, evaliation and obtain the executed sales agreement (@8- Tn, service agreement, sales contract, customer purchase order etc) a validate the actuality of a contract with the customer. d 3. Obtain the invoice issued to the customer to vouch the eC transaction price and compare it with the amounts recorded in related sales information and audit evidence obtained in SteP 2 228 a ——— oe |ry pstantive Test of Receivables and Sales sul 9 for the ev! | of lading or proof of pequest for 1 gree the quantity of items shipped to the quantity 4 geiwers)» the customer as per invoice, charset ne revenue has been recorded on or after the entity : .d the control of goods to customers based on the agreed hich can be verified in the audit evidences obtained 5 On ferre i eps 200% ' ie The appropriate timing of revenue recognition would vary alg on the specific circumstances surrounding the sales ean and on the nature of business operations of the audit ransa elated guidance for revenue recognition can be found on PFRS orver from Contracts with Customers. verify the appropriateness of classification of the transaction (eg, : ie refund, return) and the related classification depending on the Shssiications found on the entity's financial statement disclosure of Nott sales 7. Evaluate and conclude on the occurrence, accuracy and classification of sales under audit. Analysis of notes receivable and related interest An analysis of notes receivable supporting the general ledger control account may be prepared for the auditor Bustence by client's staff. The information in the analysis ordinarily Cocarrens includes the name of maker, date, maturity, amount and - all interest rate. In addition to identifying the accuracy of the ‘one analysis prepared by the client, the auditors should trace Completeness | items to the accounting records and to the notes Presentation themselves. and disclosure After ensuring the accuracy of the items included in the analysis of notes receivable, the auditor should check the accuracy of the herest by performing independent calculation. The working paper (Peal includes four columns, which show for each note receivable owned during the year the following information: » Accrued interest receivable at the beginning of the year (taken from the prior year’s audit working papers); ee earned during the year (computed from the terms of the es); : Ae collected during the year (traced to cash receipts records); * Accrued interes auditor), the in ne inter ith inter st receivable at the end of the year (computed by the “i est earned for the year as computed by the auditor does not agree st earned as shown in the accounting records, the auditor should 229 Pisubstantive Test of Receivables and Sales ference as there may be unrecorded interest rece) i gate any 4 inves that was not included in the analysis prepared by the client, or n ible current Notes Receival : notes receivable with maturities greater than one year, the aug should perform the following procedures: toy .e interest and contractual principal payments will 4, Evaluate whether thi ; c be collected in accordance with their contractual terms; and 2. If either interest or principal payments will not be collected accordance with their contractual terms, determine whether : accovance for credit loss (ie, allowance for impairment) has jy : e of the following methods: een computed using ont a, The present value of expected future cash flows discounted at the recelvable's original effective interest rate; or fh. ‘The fair value of the collateral (if the receivable is collate dependent). valuation of Allowance for Doubtful Accounts Primary Audit | As part of risk in conducting a business, some Customers Objectives: may default from their payment, Since receivables need [Waluation _] to be valued at amortized cost (e.g, net realizable value), the company needs to make a reliable estimate of bad debts or doubtful accounts in its financial statements. In some circumstances, receivables are proven to be worthless are written off An important part of obtaining evidence about the proper valuation of accounts receivable is the auditor’s evaluation of the adequacy of the Sllowance for uncollectible accounts. Since this account is a management estimate, itis typically audited by one or a combination of the following procedures: 1. Evaluating management process of developing the estimate ‘The auditor’ evaluation ordinarily includes: a. Obtaining a general understanding of the process used in developing the estimate; b. Considering the reasonableness of the entity’s policies regarding additions to the allowance and write-offs of doubtful accounts c. Discussing with management the key assumptions eB? i collectability and evaluating the reasonableness of the assumptions: 4. Considering the effectiveness of the controls over the data used im the process; and e. Evaluating the entity's method of calculating the al applying its policies). 2. Reviewing subsequent transactions. Since the best evidence © collectability of receivable is payment by the debtors ‘subsequent (0 lowance (ies 230 Le — |9 substantive Test of Receivables and Sales f date, the auditor may review subs rent ¢ appropriateness of the provisions far bad hee A asering auditors independent estimate. Base eae one py the auditor regarding the credit and ¢ ine fement process in developing the estimate, mana its independent estimate and compare it pate ny significant difference should be inv. wath the management (e.g, credit manager), don the knowledge ‘ollection process and the auditor may come with the management estigated and resolved - wea concern of auditor is whether write-offs are properly authorized ree is inadequate internal control ‘on making write-off, an employee may write-off receivable even though it is not proven to be worthless and will ti appropriate subsequent collection. artnarly, the auditor would perform the following procedures: i. Evaluate the accounts that have been written off and examine aging schedule for potential additional write-offs; 2, Determine whether significant amounts written off during the year have been approved by a responsible official independent of the cash receipts, sales and receivables functions; and 3, Mail confirmation requests to customers that have been written off (there should not be a response). Note: In auditing impairment loss of debt securities (ie, credit loss), the accounting and disclosure requirements of PFRS 9 should be considered specially for public interest entities. Accounts Receivable and Sales Cutoff Primary Audit | As discussed in the previous chapter, one way to show jectives:_| more favorable financial position and performance fasence (termed as window dressing) is to inflate sales and cash by | holding open the sales journal and cash journal beyond Completeness | the reporting date. Cutoff St! To detect such misstatements due to inaccurate cutoff of Sales records (whether accidental or intentional), the auditor should Perform analytical procedures to identify peaks in sales volume in the last sit days or weeks of the year and test cutoff by inspecting sales register a8 Shipping documents and other supporting documents before an erthe year end date. Theauditor should ordinarily perform the following cutoff procedures: ' Obtain cutoff information such as numbers on last shipping documents, invoices, credit memos and cash receipts, °r before the cutoff date and check whether this was Proper accounting period; for a period on recorded in the 231t of Receivables and Sales substantive Tes! chapter 9 for the month before ang alte t i ey pet 4 sample of transactions from the activity listing 3. after cutoff date and related supporting documentation to er the transactions were recorded in the proper period; and "Sure th 4, Compare the receivables cutoff with cutoffs in related areas eg, f 88, sie and cash. Kindly refer tO Exhibit 1 at the end of this chapter for sample ia Receivable (Sales) Cut-off. i before ay Test of Details for Completeness of Sales Primary Audit | To test the completeness of the recorded sales during Timary tes: | audit period, the auditor shall determine an approprag Completeness] reciprocal population. A reciprocal population is : population of items that are expected to be recorded in the population g audit interest (i.e., sales). The determination of the appropriate reciprocy, population is dependent on the proper understanding of the revenye business process of the audit client. As an example, the shipping log whi contains the shipping information of the client of its goods may serve as an appropriate reciprocal population. Audit procedures to perform this test may include the following: 1, Obtain from the client the appropriate reciprocal population (eg, shipping log) and related sales records (e.g. sales transaction detail). 2. Select shipment transactions from the reciprocal population for testing and obtain audit evidences such as proof of delivery or bill o lading (BOL). 3. Trace and agree the quantity from the reciprocal populati quantity in the related sales records. 4, Evaluate and conclude whether the shipments selected are appropriately recorded as sales transactions for period under audit. jon to the Receivables Denominated in Foreign Currencies PrimaryAudit | Portion of the receivables of an entity may 7 Sbiectives: denominated in foreign currency as a result of ‘sales, loan [Valuation] or other transaction in that foreign currency. As reat! by PAS 21 The Effects of Changes in Foreign Exchange Rates, ee receivables (i.e, monetary asset) should be translated using the closin8 rate at the reporting date, The auditor ordinarily obtains the closing rate and re performs the translation of the foreign currency denominated receivable ‘The auditor should also ensure that any foreign currency transaction 8#"" or Joss should be reported as part of profit or loss. 232substantive Test of Receivables an te Any Transactions with or Re ransactions between thered Party Rece id Sales orpo : ara eau T eS: stockholders O24 Its directors, part ies require Particular attenti¢ other affiliated ecause these related par the audit arm’s-length bargainine ney, ansact Nef Ing by pa aol .d party receivables are materia Parties of ol : | the audito PPosing interest, 1¢ isis of advances to directors, officers wo" Should allowing see Secktolder, at determine he detailed tri relate na on affliated parties and perform the f , Recalculate the total balance and * jalance in the general ledger or t 2, Review the list for potential Problem accounts 3, Identify the purpose for advances and ‘Determine if such advances sho 5, If the balances are significa selected individual balances and reconcile replies; 6, Determine that such advances h individuals appropriate under the the company, 7. 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; and 8. Determine the adequacy of disclosure in balance of receivable and any amount wri that it agrees wi with al balance; = or large amounts; ‘ave been properly approved by by-laws of t : the notes of the transaction, itten-off. Credit Balances and Unusual Items Primary Audit | Accounts receivable is an asset; therefore, the normal Objectives: balance is on the debit side. However, it may have a credit Presentation | alance due to overpayment by customers, or in some {and Disclosure J cases, it can be caused by errors or irregularities. The auditor should obtain and review the listings of credit transactions together with receivable balances with large or unusual items, and test the completeness of the listing. The auditor should investigate why major credit lances have arisen and should consider their impact on bee Meeivables. The auditor should consider that credit balance of carne should be presented under the liabilities section and not Sa duction to those receivables with a debit balance. This is oe 'ncluded as part of reclassification entries in the auditor's working P Assigned jitertain Whether Any Receivables Have Been Pledge or ime PritaryAudié| The main objective of audit proce ures vey the rales presentation and disclosure See er als ivables appropriate! ae Sear opreeiaie disclosures. For financial 233substantive Test of Receivables and Sales Chapter, tation, the auditor should ensure that trade receivable ang trade receivable is presented under one line item “trade CU ‘ded by PAS 01 Presentation of Financial San Othep Receivable pledged or assigned should be properly disc the notes to inform the reader of financial statements that te hy contingent liability attached with the receivable. Ordinarily, the fol}, re are the procedures performed by the auditor: : 1, Evaluate the statement of financial position and stateme comprehensive income for proper classification; Nt of 2. Read footnotes regarding disclosures about factoring, assi, pledging, special sale transaction and related party transactions, an Obtain and evaluate the management representation ha concerning the revenue/receipt cycle during the completion phase, ter ied may also be disclosed through confirmation Evidence of receivables pledg' {banks and other financial institutions) requests, which specifically call for, description of the collateral securing bank loan. receit 's owing 3. ical Procedures Primary Audit | To evaluate the reasonableness of amounts reported in jectives: the financial statement, the auditor should perform Completeness | analytical procedures. Typical analytical procedures for mera sales include the following: 1. Compare sales for the last month of the fiscal year Presentation 0 and disclosure .st of the year and the first month after Perform Anal} to sales for the re: year end; and 2. Compare monthly sales returns and credit memos for the last few ceenths of the fiscal year to the first few months following year end For accounts receivable, apply analytical procedures by determining the in previous period: following and comparing to percentages 1. Trade receivables divided by current assets; 2. Trade receivables divided by total assets; 3, Receivable turnover (net sales divided by averas and 4. Average collection period or days sales out divided by receivable turnover). For any significant differences or fluctuations noted, investiga! and cause of the differences and consider whether additional proced are needed to test sales cutoff. It may be clarified that the foregoing is only an illustrative list of | ana out an a review procedures which an auditor may employ in carrying b receivables and sales. The exact nature of analytical review procedures (0 ge trade receivables) tstanding (trade receivable te the natu" jure 234ost Substantive Test of Receivables and ales plied api itor. tation rdocument : i performing analytical procedures, ¢ " ‘The expectation and the factors con: readily determinable from the wor! . The results of the comparison between tj amounts; and he expectation and recorded 3, Any additional procedures perform, ‘ unexpected differences and the result: a specific situation is a matte ” Of profe ess aud ene! judgment of the he audito : I sidered in j hould document its 4 performed), “!°Pment (unless ed in reg pon: roa S of those prom ag, SiBni Procedures, os other Audit Considerations sales Returns and Allowances. When auditing receivables and sales, the au, related accounts such as sales return and allowances, the following are the main concer 4, Were returns properly authorized? 2. Were goods returned? ditor should also check the allowances. For bs returns n of the auditor: and Ensuring that recorded sales adjustments actually occurred is import because a diversion of cash from an account receivable collection coil Be covered up by a fictitious sales return or allowance. Audit procedures to check whether returns were properly authorized and if goods are actually returned include examining receiving reports, credit memos and entries in the accounting records. Imputed Interest The auditor should 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 reporting date. Also, proper statement of financial position classification of such receivables must be considered. Employee Travel Advances ‘The auditor should obtain or prepare a schedule of the detailed balances included in employee travel advances and perform the following steP®" 1. Recalculate the schedule to determine the clerical accuracy 2 determine that the total balance agrees with the general a _-— 2. Compare individual information with the source records oa Document the items tested; ai ‘onfirm account balances with indiv' amount is significant (this is very rarely eee replies. Retain copies of all confirmations ™ d Seed Determine whether there is a proper cutoft 0 the last payroll for year end. 5 if the total : lovee idual emmy and reconcile dvances with 9325Chapter 9 - Substantive Test of Receivables and Sales y Summary of audit procedures classified er assertion Applicable to Receivables i Assertion Category Primary audit rocedures a Existence Y Confirmation of Teceivables to Cl review of subsequent cash rect”, “UStomen ‘ecej Sg) Y Inspect notes on hand and ane on hand ™ those Performing receivable and sales Cutoff Perform analytical procedures Reconciliation of subsidiary general ledger Analysis of notes receivable ang interest Telateg Performing receivable and sales cutoff Perform analytical procedures Valuation and Confirmation of receivable: Allocation Analysis of notes recei HT interest Evaluating the adequacy of allowance for uncollectible accounts, | Testing valuation of receivable: I in foreign currencies I Examining sales returns and allowances | Ascertaining authorization of write-off Perform analytical procedures | Confirmation of receivables to customers & review of subsequent cash receipts. | Inspect notes on hand and confirm those nat HHH on hand | Performing receivable and sales cutoff Presentation and Analysis of notes receivable and related) | Disclosure interest Not AN Completeness < ledger ap < SSS s to customers vable and relateg, x % 'S denominated | isan | Rights and Obligations < IN Investigate receivables from related partes. Investigate any credit balances and unust items 2S. ¥ _Ascertain the existence of pledged receivables VN Applicable to Sales and Other Income Statement Related Item Assertion Category Primary audit procedures Occurrence Y Confirmation of receivables to custome an Y Analysis of notes receivable an interest ir Y Performing receivable and sales cuto! Y Test of details of recorded sales | sear 236ables and Sales ~ Subs! a _— = Vv Zompleteness tantive Test of | v_Asce Examining sales returns and allowances Ascertaining authorization of write-off Analysis of notes receivable and related interest Performing receivable and sales cutoff ‘Test of details for completeness of sales Perform analytical procedures ASK KK ecuracy Confirmation of receivables to customers Analysis of notes receivable and related interest Test of details of recorded sales Glassification Test of details of recorded sales INES Performing receivable and sales cutoff Cutoff Exhibit 1: Accounts Receivable (Sales) Cut-off Client: Ray Sibabol Accounts Receivable (Sales) Cut-off Period end: December 31, 2021 ‘Transactions recorded before December 31 Reference: AR.O1 ‘uring AbS14344 | 12/29/2021_| 12/28/2021 Yes Bising ABS14345 | 12/29/2021_[ 12/28/2021 Yes Crising ‘ABS14346 | 12/30/2021 _| 12/29/2021 Yes Dante ABS14347__| 12/30/2021 _| 01/05/2022 No Emong ABS14348 | 12/30/2021 _| 12/29/2021 Yes Fabian ‘Apsi4349__ | 12/30/2021_| 12/29/2021, Yes Transactions recorded after December 31 Corio ‘AbS14351 | 01/03/2022 _| 01/03/2022 Yes Huaning ABS14352 | 01/05/2022 _| 01/04/2022 Yes ‘sang ABS14353 | 01/06/2022 _| 12/29/2022 No Jolina ABS14354 01/05/2022 _| 01/04/2022 No Kiko ABS14355 | 01/06/2022 _| 01/05/2022 Yes Lannie ABS14356 | 01/04/2022 _[ 01/03/2022 Yes Traced to bill of ading/delivery receipt and sales invoi 2379 - substantive Test of Re les eae ye Form of Receivable Confirmation exhibit 2: Positive F January 4 5.20% sin(s): ae an confirm directly to our auditors Asuncion, Escala, Ngina & Co, P.0. Box 14344, 2600 Baguto City nayable to us as shi <5 of the balance of your account payal own below 4 te corr statement at December 31, 2021 for thelr use in connection no he eximiation of our accounts. f the amount is correct, please sign this tense, tte provided below. If not correct, please list on the remarks portion full gg? Sbece Metals og difference. the A return envelope is enclosed for your reply. No postage stamps are required, PLEASE NOTE THE DATE as of which we request confirmation, Tran with us or payments tous between that date and the date you receive this letter mt to be considered. mn Thank you for your cooperation. Please fax an advance copy of your Very truly yours, reply at 143-1434, Attention of Mr. Darrell Escala, Partner- ~_RFB. in-Charge. Raymund Joe ‘ontroller RFE Company THIS IS NOT A REQUEST FOR PAYMENT, BUT MERELY FOR CONFIRMATION OF YOUR ACCOUNT. ‘THE FOLLOWING BALANCE DUE FROM US IS CORREC Dueto; RFECompany _ As of: December 31, 2021 Amount: P1,430,440.17 Remarks: None Signature: Francine Rey 238yr uarTee auditor mo + Fansactions W surrence as _ g~ Substantive Test of Receivables and Sales : 2S ron 9: REVIEW QUESTIONS - THEORETICAL ist likely would limit substantive audit tests of sales Then control risk is assessed as low for the existence or trtion concerning sales transactions and the auditor has, ery gathered evidence supporting: al ay pping and receiving activities. ‘and closing inventory balances. ening Opening sales and purchases. c Cutoffs of Cash receipts and accounts receivable. sic ofthe following areas would ordinarily be expected to require the wnitime when performing an audit ofa continuing client? vaccounts receivable. b. Common stock. f Retained earnings: @._ Revenues. Which of the following is a proc and/or occurrence of sales? Vouching receivables to shipping documents. Vouching recorded sales transactions to customer orders and shipping edure to verify the existence of receivables a b documents. ‘Tracing the shipping documents to recorded sales transaction and c receivable. d. Confirmation of receivables to customers. Ofthe two forms of confirmation request, which is considered more reliable source of evidence? a. Positive confirmation b._ Negative confirmation c. Both are equally reliable 4. None of the two is considered more reliable 5 Which of the following scenario would positive confirmation be appropriate? a. The assessed level of inherent and control risk for receivable and sales is very low. b. Very few or no exceptions expected. © The auditor has a reason to bel confirmation requests will disregard su 4. The receivable comprises a large M\ account balances. Jieve that recipients of negative ch confirmation requests. umber of small, homogenous, 239Test of substantive 7 chapter 9 following is the best argument against the use of nega 6 10. f Receivables and Sales i which of the ple confirmations? ve aemounts receivable =" ‘The cost per resp of ‘There is no way Recipients ae likely to . men re erence m drawn from receiving no rep| 4. The inference drawn fro! PIV May not correct. ‘~ fh of the following would be least likely to diminish the Wich obtained through confirmation of accounts receivable? cide onfirmations are sent on the client's letterhead. ‘The confirmations are mailed to customers by the internal a ively high. se is excessively Fe: vt knowing ifthe intended reciptents receiveg the feel that in reality the confirmati a b ION is a sup co Ube Validity o Ey 7 ‘ernal auditors, ¢@. The client's mailroom personnel closely monitor and inset confirmations during mailing. 4 The return address on the envelope used to send the confirma, request is that of the client. What is the primary assertion being addressed by confirmation receivables? a. Completeness b. Gross valuation c. Existence d. Accuracy of To test the existence assertion for recorded receivables, an auditor would select a sample from the. a. Sales orders file. b. Customer purchase orders. © Accounts receivable subsidiary ledger. Shipping documents (bills of lading) file. a During the process of confirming receivables as of December 31, 2021, Positive confirmation was returned indicating the “balance owed as of December 31 was paid on January 9, 2022.” The auditor would most likely a. Determine whether there were any changes in the account between January 1 and January 9, 2022, b. Determine whether a customary trade discount was taken by the customer. © Reconfirm the zero balan ice as of January 10, 2022. d. Verify that the amount wi se /as received, 2404 8 er 9 = Substantive T chat ee Mf Recelvaby an auditor confirms a representative sof December 31, and Investig Somments. By this procedure the wich of the following? One of the cashiers hy, lapping. b, One of the sales clerks | * sales to family and friends, «One ofthe computer control clerks has boen removing applicable to his a coun tom heats he credit manager has tlsappropriated remittanc : ess ess have been written off “d remittances from customers nd Sales Humber of oper ates responder auditor would be N accounts receivable Nts’ exceptions and most likely to learn of " as been covering 4 personal embe; lement by * Mot been preparing eh '8e slips for credit all Sales invoices Which of the following is least likely to be altemate procedure for handling nonreptiesy confirmations? a. Examine bills of lading, b. Physically examine items sold, c. Examine correspondence, d. Examine subsequent cash receipts, 'ypically considered to be an 0 positive accounts receivable Which of the following types of miss the auditor when verifying the occurrence of sal a, Recorded sale with no shipment b. Sale recorded more than once & Shipments in transit to customer at year end 4 Shipments made to nonexistent customers Which of the following is the be: with no shipment? &._ Trace from sales journal entry to shipping document. b. Check cancellation of shipping documentation & Review segregation of duties and ensure the person recording sales should not authorize shipments, Trace from shipping documents to recorded sales transaction, ‘St audit procedure to detect recorded sale a Tracing recorded sales transactions in the sales journal to the shipping Scuments (bills of lading) provides evidence about the: f Completeness of recording of sales transactions, Occurrence Of sales transactions, & Billing ofall sales transactions, Presentation of payables, aih® objective of atest of details is to detect overstatements of sales; the auditor should trace transactions from the Cash receipts journal to the sales journal, Sales journal to the cash receipts journal. Source documents to the accounting records. Accounting records to the source documents. 241 ~~substantive font of Receivables And Sales chapter pacodures 1 Joant likely to help audite, miei AC CONNE eHIIATE OF the lyn ey Ne “iy Howie 1 yleh of the fol y nwa ny oF nan cc ouint! i on nein fenton o input p, Reviow at oat eh yer agate credit ratings for large a counts receivable, c di, Dineus® with the credit manager the current status of ovuty account: My a, Which of the following iw considered the best audit procedure evidence regarding the ‘collectability of a receivable? a, Analysis of the ‘allowance for doubtful accounts sending confirmation request to customers: «Reviewing subsequent payment of customers SUDSEQUENE 10 thy reporting date. 4, Cross-footing the aging schedule of receivables, AMouy Ms ws counts while jy have been We iiten off a Uncolectible y Mion 10 obtaly to, Cutoff tests designed to detect credit sales made before the end of the year that have heen recorded In the gubsequent year provide assurance abou managements assertion of a, Presentation. b, Completeness, Rights, di, Existence, sh receipts journal open after 12/31/2024 for an enn day and included January 1, 2022 cash receipts 0 the 12/31/2021 totals. ‘Ail of those cash receipts were due to cash sales, Assuming the client usesa periodic Inventory system with a 12/ 1/2021 count of the physic inventory, which of the following is most likely to be true relating to the 2021 financial statements? Sales are understated, b, Accounts receivable are understated, Inventory Is overstated, d, Net income is overstated, 2, Your client left the a What type of error is the CPA most likely to discover when he/she examine all shipping reports dated in January of 2022, shipped FOB shippin® point we ‘were recorded in December of 2021 as credit sales? b a oun receivable are overstated at December 31,2021. - pi recsctbsrsundrsited at December 31,2021) aber Operating expenses are overstated forthe 12 months ended Dec os returns and allowance are overstated at December 31,202 4. 242— 9 ~ Substantive Test of Receivables and Sales cnapte! t might overstate December 31 accounts receivable balances by and recording January transactions in December. Such entries dating din which journal are most likely to achieve this end? cash receipts. Payroll. f archases. 4. Sales the best evidence regardin, a To oo receivable, the auditors: aeerrace a sample of the bills of lading to sales invoices, confirma sample of accounts payable, ¢._ Review the aging of accounts receivable, Trace a sample of recorded sales to shipping documents, 8 the completeness of recorded ‘4 An auditor's analytical procedures have reve: receivable of a client have doubled since the end the allowance for doubtful accounts, remained about the same. Which of likely would satisfy the auditor? a. Credit standards were liberalized in the current year. b, Twice as many accounts receivable were write compared to this year. c. A greater percentage of accounts were currently listed in the "more than 90 days overdue" category than in the prior year, 4 The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet, % Which of the following generally valuation of accounts receivable? Reviewing an aging of accounts receivable. b. Examination of cash receipts subsequent to the balance sheet date, © Confirming current (0-30 day) year-end accounts receivable. 4. Reviewing credit files for selected account. ‘led that the accounts of the prior year, However, as a percentage of accounts receivable the following client explanations most n off in the prior year as provides the least evidence regarding the 243