1. 14 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 14 Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

2. 14 - 2 Copyright  2003 Pearson Education Canada Inc. An aged trial balance is the basis for many tests of A/R and the allowance for uncollectible accounts. 12/31/04 AGE, BASED ON INVOICE DATE CUSTOMER BALANCE 0 -30 31-60 61-90 OVER 90 AKINC 1276 170 1106 BOWERS 534 534 DEWASTALI 7523 7100 423 DUNKLEBURG 97 97 EASLEY 23000 21000 2000 EWING 8969 8969 GOHO 1500 1500 HARRISON 56900 56900 MCCRAY 6500 6500 106299 30304 3203 6923 65869

3. 14 - 3 Copyright  2003 Pearson Education Canada Inc. ? GAAS requires confirmation of a sample of a/r unless:

4. 14 - 4 Copyright  2003 Pearson Education Canada Inc. GAAS requires confirmation of a sample of a/r unless: - combined IR & CR is low

5. 14 - 5 Copyright  2003 Pearson Education Canada Inc. GAAS requires confirmation of a sample of a/r unless: - combined IR & CR is low - use of confirmations would be ineffective

6. 14 - 6 Copyright  2003 Pearson Education Canada Inc. A/R confirmations are effective in discovering: ?

7. 14 - 7 Copyright  2003 Pearson Education Canada Inc. A/R confirmations are effective in discovering: - fictitious accounts (existence)

8. 14 - 8 Copyright  2003 Pearson Education Canada Inc. A/R confirmations are effective in discovering: - fictitious accounts (existence) - incorrect amounts (accuracy)

9. 14 - 9 Copyright  2003 Pearson Education Canada Inc. A/R confirmations may help in discovering: - uncollectibles

10. 14 - 10 Copyright  2003 Pearson Education Canada Inc. A/R confirmations are not effective in discovering: ?

11. 14 - 11 Copyright  2003 Pearson Education Canada Inc. omitted accounts (completeness) A/R confirmations are not effective in discovering:

12. 14 - 12 Copyright  2003 Pearson Education Canada Inc. Why might a client intentionally omit some a/r? 12/31/04 AGE, BASED ON INVOICE DATE CUSTOMER BALANCE 0 -30 31-60 61-90 OVER 90 AKINC 1276 170 1106 BOWERS 534 534 DEWASTALI 7523 7100 423 DUNKLEBURG 97 97 EWING 8969 8969 GOHO 1500 1500 MCCRAY 6500 6500 ?

13. 14 - 13 Copyright  2003 Pearson Education Canada Inc. Why might a client intentionally omit some a/r? The client may not wish to disclose a/r of related parties.

14. 14 - 14 Copyright  2003 Pearson Education Canada Inc. A/R confirmations may be either positive or negative. What is the difference? + -

15. 14 - 15 Copyright  2003 Pearson Education Canada Inc. A/R confirmations may be either positive or negative. What is the difference? Negative confirmations request a re- sponse only if the debtor believes that the amount printed on the confirmation is incorrect.

16. 14 - 16 Copyright  2003 Pearson Education Canada Inc. A/R confirmations may be either positive or negative. What is the difference? Negative confirmations request a re- sponse only if the debtor believes that the amount printed on the confirmation is incorrect. Positive confirmations request that the debtor respond whether or not the bal- ance is correct or they ask the debtor to indicate the amount owed at a certain date.

17. 14 - 17 Copyright  2003 Pearson Education Canada Inc. Which form of A/R confirmation is more reliable, positive or negative?

18. 14 - 18 Copyright  2003 Pearson Education Canada Inc. Which form of A/R confirmation is more reliable, positive or negative? A nonresponse to a positive confirmation is investigated. more reliable A nonresponse to a negative confirmation is assumed to signify debtor agreement with client balance. This may be an erroneous assumption. Why?

19. 14 - 19 Copyright  2003 Pearson Education Canada Inc. Which form of A/R confirmation is more expensive, positive or negative? + -

20. 14 - 20 Copyright  2003 Pearson Education Canada Inc. Which form of A/R confirmation is more expensive, positive or negative? Positive confirmations are more expensive because they require more return postage and follow-up procedures if they are not returned. All positive confirmations should be returned; negative confirmations are returned only if amounts are disputed. Auditor Client Customer paid by auditor Canada 48

21. 14 - 21 Copyright  2003 Pearson Education Canada Inc. In deciding whether to use positive or negative confirmations, consider: ?

22. 14 - 22 Copyright  2003 Pearson Education Canada Inc. In deciding whether to use positive or negative confirmations, consider: - prior experience with client, industry - nature of information being confirmed - appropriate respondents - effectiveness of internal controls - number of account balances and debtors

23. 14 - 23 Copyright  2003 Pearson Education Canada Inc. What is the preferable timing for confirmation procedures?

24. 14 - 24 Copyright  2003 Pearson Education Canada Inc. What is the preferable timing for confirmation procedures? the balance sheet date WHY? December

25. 14 - 25 Copyright  2003 Pearson Education Canada Inc. Could confirmation procedures occur during interim testing? October

26. 14 - 26 Copyright  2003 Pearson Education Canada Inc. Yes, if the internal controls after the interim date are considered adequate. Could confirmation procedures occur during interim testing?

27. 14 - 27 Copyright  2003 Pearson Education Canada Inc. Confirmation Sequence what’s first?

28. 14 - 28 Copyright  2003 Pearson Education Canada Inc. 12/31/04 AGE, BASED ON INVOICE DATE CUSTOMER BALANCE 0 -30 31-60 61-90 OVER 90 AKINC 1276 170 1106 BOWERS 534 534 DEWASTALI 7523 7100 423 DUNKLEBURG 97 97 EASLEY 23000 21000 2000 EWING 8969 8969 GOHO 1500 1500 HARRISON 56900 56900 MCCRAY 6500 6500 106299 30304 3203 6923 65869 Confirmation Sequence obtain a/r aging

29. 14 - 29 Copyright  2003 Pearson Education Canada Inc. 12/31/04 AGE, BASED ON INVOICE DATE CUSTOMER BALANCE 0 -30 31-60 61-90 OVER 90 AKINC 1276 170 1106 BOWERS 534 534 DEWASTALI 7523 7100 423 DUNKLEBURG 97 97 EASLEY 23000 21000 2000 EWING 8969 8969 GOHO 1500 1500 HARRISON 56900 56900 MCCRAY 6500 6500 106299 30304 3203 6923 65869 Confirmation Sequence obtain a/r aging select specific a/r for confirma- tion

30. 14 - 30 Copyright  2003 Pearson Education Canada Inc. Confirmation Sequence obtain a/r aging select specific a/r for confirma- tion how? -judgmentally? -statistically? -client involvement?

31. 14 - 31 Copyright  2003 Pearson Education Canada Inc. Confirmation Sequence obtain a/r aging select specific a/r for confirma- tion print confirmations and mail them

32. 14 - 32 Copyright  2003 Pearson Education Canada Inc. Confirmation Sequence obtain a/r aging select specific a/r for confirma- tion print confirmations and mail them analyze results, investigate disputed amounts

33. 14 - 33 Copyright  2003 Pearson Education Canada Inc. Confirmation Sequence What if the response rate is unacceptably low? obtain a/r aging select specific a/r for confirma- tion print confirmations and mail them analyze results, investigate disputed amounts

34. 14 - 34 Copyright  2003 Pearson Education Canada Inc. Confirmation Sequence What if the response rate is unacceptably low? obtain a/r aging select specific a/r for confirma- tion print confirmations and mail them analyze results, investigate disputed amounts Consider the cost/benefit of a second mailing.

35. 14 - 35 Copyright  2003 Pearson Education Canada Inc. Confirmation Sequence What if the response rate for the second mailing is unacceptably low? obtain a/r aging select specific a/r for confirma- tion print confirmations and mail them analyze results, investigate disputed amounts

36. 14 - 36 Copyright  2003 Pearson Education Canada Inc. Confirmation Sequence What if the response rate for the second mailing is unacceptably low? obtain a/r aging select specific a/r for confirma- tion print confirmations and mail them analyze results, investigate disputed amounts Consider the cost/benefit of a third mailing.

37. 14 - 37 Copyright  2003 Pearson Education Canada Inc. Confirmation Sequence obtain a/r aging select specific a/r for confirma- tion print confirmations and mail them analyze results, investigate disputed amounts What if the response rate for all mailings is unacceptably low?

38. 14 - 38 Copyright  2003 Pearson Education Canada Inc. Confirmation Sequence obtain a/r aging select specific a/r for confirma- tion print confirmations and mail them analyze results, investigate disputed amounts What if the response rate for all mailings is unacceptably low? Use alternative procedures to determine existence and accuracy of a/r or:

39. 14 - 39 Copyright  2003 Pearson Education Canada Inc. Confirmation Sequence obtain a/r aging select specific a/r for confirma- tion print confirmations and mail them analyze results, investigate disputed amounts What if the response rate for all mailings is unacceptably low? Treat the non-response as an error to be projected to the population

40. 14 - 40 Copyright  2003 Pearson Education Canada Inc. ideas? Use alternative procedures to determine existence and accuracy of a/r.

41. 14 - 41 Copyright  2003 Pearson Education Canada Inc. - examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r Use alternative procedures to determine existence and accuracy of a/r. Pace Corporation 324 $ Bank of Montreal pay to the order of date

42. 14 - 42 Copyright  2003 Pearson Education Canada Inc. - examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r - examine bills of lading and shipping documentation Use alternative procedures to determine existence and accuracy of a/r. ACE

43. 14 - 43 Copyright  2003 Pearson Education Canada Inc. - examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r - examine bills of lading and shipping documentation - examine sales invoices Use alternative procedures to determine existence and accuracy of a/r.

44. 14 - 44 Copyright  2003 Pearson Education Canada Inc. - examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r - examine bills of lading and shipping documentation - examine sales invoices - examine client correspondence Use alternative procedures to determine existence and accuracy of a/r.

45. 14 - 45 Copyright  2003 Pearson Education Canada Inc. - examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r - examine bills of lading and shipping documentation - examine sales invoices - examine client correspondence Which of these procedures has the greatest reliability?

46. 14 - 46 Copyright  2003 Pearson Education Canada Inc. those involving third parties - examine cash receipts journal, bank accounts, and bank statements for evidence of subsequent payment of year-end a/r - examine bills of lading and shipping documentation - examine sales invoices - examine client correspondence Which of these procedures has the greatest reliability?

47. 14 - 47 Copyright  2003 Pearson Education Canada Inc. Dear auditor: We received your confirmation dated 1/30. Unfortunate- ly, our bookkeeping system does not allow us to confirm any balances other than the current balance. SORRY! Client Customer What if the auditor receives a response similar to this?

48. 14 - 48 Copyright  2003 Pearson Education Canada Inc. What if the auditor receives a response similar to this? Dear auditor: We received your confirmation dated 1/30. Unfortunate- ly, our bookkeeping system does not allow us to confirm any balances other than the current balance. SORRY! Client Customer - contact customer and encourage a satisfactory response

49. 14 - 49 Copyright  2003 Pearson Education Canada Inc. What if the auditor receives a response similar to this? Dear auditor: We received your confirmation dated 1/30. Unfortunate- ly, our bookkeeping system does not allow us to confirm any balances other than the current balance. SORRY! Client Customer - contact customer and encourage a satisfactory response - consider alternative procedures

50. 14 - 50 Copyright  2003 Pearson Education Canada Inc. What if the auditor receives a response similar to this? Dear auditor: We received your confirmation dated 1/30. Unfortunate- ly, our bookkeeping system does not allow us to confirm any balances other than the current balance. SORRY! Client Customer - contact customer and encourage a satisfactory response - consider alternative procedures - treat as error to be projected to the population

51. 14 - 51 Copyright  2003 Pearson Education Canada Inc. Confirmation Sequence statistically and/or judgmentally determine whether the extent of exceptions will affect internal control evaluation and acceptability of a/r balance obtain a/r aging select specific a/r for confirma- tion print confirmations and mail them analyze results, investigate disputed amounts

52. 14 - 52 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - confirm a sample of a/r

53. 14 - 53 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - confirm a sample of a/r - inquire about third party claims to client receivables (e.g., pledging)

54. 14 - 54 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - confirm a sample of a/r - inquire about third party claims to client receivables (e.g., pledging) - perform analytical procedures on receivables and related accounts (sales, bad debt expense, allowance for uncollectible accts.)

55. 14 - 55 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - perform analytical procedures on receivables and related accounts - review year-end cutoff for sales. Examine all sales invoices and related shipping documents and cash receipts for several days before and after the balance sheet date. Determine when title to the goods passed.

56. 14 - 56 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - perform analytical procedures on receivables and related accounts - review year-end cutoff for sales - after reviewing a/r aging, discuss pos- sible a/r write-offs and the adequacy of the allowance with management

57. 14 - 57 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - perform analytical procedures on receivables and related accounts - review year-end cutoff for sales. - after reviewing a/r aging, discuss possible a/r write-offs and the adequacy of the allowance with management - inspect notes receivable

58. 14 - 58 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - perform analytical procedures on receivables and related accounts - review year-end cutoff for sales. - after reviewing a/r aging, discuss possible a/r write-offs and the adequacy of the allowance with management - inspect notes receivable - vouch a sample of a/r to customer order, sales order, sales invoice, shipping documents, cash receipts

59. 14 - 59 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - trace a sample of accounts from trial balance to master file and vice versa

60. 14 - 60 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - trace a sample of accounts from trial balance to master file and vice versa - foot trial balance and aging columns

61. 14 - 61 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - trace a sample of accounts from trial balance to master file and vice versa - foot trial balance and aging columns - trace a/r trial balance/master file to general ledger

62. 14 - 62 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - trace a sample of accounts from trial balance to master file and vice versa - foot trial balance and aging columns - trace a/r trial balance/master file to general ledger - review aged trial balance for related party transactions

63. 14 - 63 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - trace a sample of accounts from trial balance to master file and vice versa - foot trial balance and aging columns - trace a/r trial balance/master file to general ledger - review aged trial balance for related party transactions - inquire of management about related party transactions, and likelihood of collecting older accounts.

64. 14 - 64 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - review sales returns and allowances after balance sheet date

65. 14 - 65 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - review sales returns and allowances after balance sheet date - trace a sample of accounts from aged trial balance to a/r master file

66. 14 - 66 Copyright  2003 Pearson Education Canada Inc. Receivables Audit Procedures - review sales returns and allowances after balance sheet date - trace a sample of accounts from aged trial balance to a/r master file - review of minutes of meetings