1 chapter 16 completing the tests in the sales and collection cycle accounts receivable

1

Chapter 16

Completing the Tests in

the Sales and Collection Cycle

Accounts Receivable

2

The introduction

… she discovered that a new real-time system for processing sales transactions had been implemented

Susan’s substantive tests of transactions identified misstatements.

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Analytical Procedures - Planning

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Substantive Analytical - Planning

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What is the objective of AU-C section 500?

Courtney

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.04 The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion.

AU-C 500Audit Evidence

7

Melanie

How does detection risk get reduced ?

8

Matt F

what is the audit risk model ?

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Audit Risk Model

Tests eSubstantiv extensive low PDR if

Tests eSubstantiv limited high PDR if )(

assessment CR theoffunction a is DR of level required the

rearrange

CRc

CRfPDR

RoMMAAR

PDRPDRRoMMAARPDRCRIRAAR

10

Holly

pretend GAAS requires AAR ≤ .05

Controls are ineffective, we assess RoMM as MAX

Which audit approach are we going to take ?

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Megan

pretend GAAS requires AAR ≤ .05

Controls are ineffective, we assess RoMM as MAX (1.00)

We are taking the Primarily Substantive Approach

What is the Planned Detection Risk ?

12

Donne

pretend GAAS requires AAR ≤ .05

Controls are effective, not great but

Somewhat effective and

we assess RoMM as 0.25

What is the Planned Detection Risk ?

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JP

pretend GAAS requires AAR ≤ .05

Controls are effective, not great but

somewhat effective and

we assess RoMM as 0.25

Which audit approach will we take?

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Dominic

pretend GAAS requires AAR ≤ .05

Controls are effective, we assess RoMM as 0.03

Which audit approach will we take ?

15

Craig

pretend GAAS requires AAR ≤ .05

Controls are effective, we assess RoMM as 0.03

We will take the Reduced Level of Control Risk Approach

What is the Planned Detection Risk ?

16

Brianna

Which assertions relate to Account Balances?

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Page 59

18

Colleen

Describe Vouching

Describe Tracing

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Stephanie

If we are auditing assets

are we most concerned with

overstatement or understatement

20

Colby

If we are auditing LIABILITIES

are we most concerned with

overstatement or understatement

21

Eastwood

If we are auditing Sales or Revenues

are we most concerned with

overstatement or understatement

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Bill

If we are auditing EXPENSES

are we most concerned with

overstatement or understatement

23

Katie

If we are auditing Accounts Receivable

are we most concerned with

Existence or Completeness

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Kyle C

If we are auditing Cash Receipts

are we most concerned with

Occurrence or Completeness

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Kayla

If we are auditing CASH DISBURSEMENTS

are we most concerned with

Occurrence or Completeness

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Adam

what are the three types of substantive tests?

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Analytical Procedures - Substantive

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aged trial balance

page 285

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over over over90 days 60 days 30 days current balance

Ace 2,529 2,016 11,876 16,421Applied 15,939 27,901 43,840Barry 1,089 743 3,176 8,993 14,001Brandt 501 7,310 30,948 24,441 63,200Cermetrics 3,814 8,617 12,431Columbia 4,321 4,321Drake 740 2,954 3,693EMC 1,261 1,048 16,195 18,504

W&M 1,905 2,167 28,390 32,461Yancey 815 2,861 9,874 13,562 27,112

10,157 56,706 160,537 392,136 619,537

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Kelly

with which financial statement assertion might the aged trial balance be helpful ?

Figure 3 page 285

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AU Section 330The Confirmation Process

(Supersedes section 331.03.08)Source: SAS No. 67.Effective for audits of fiscal periods ending afterJune 15, 1992, unless otherwise indicated.

Introduction and Applicability

01 This section provides guidance about the confirmationprocess in audits performed in accordance withgenerally accepted auditing standards. This section

ù Defines the confirmation process (see paragraph.04).

ù Discusses the relationship of confirmationprocedures to the auditor's assessment of auditrisk (see paragraphs .05 through .10).

ù Describes certain factors that affect the reliabilityof confirmations (see paragraphs .16 through .27).

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Connor

which opinion do we issue

while attempting to confirm the client’s accounts receivables – the client will not provide you the necessary information to confirm many of their largest customers

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Norman

what are two forms of

receivables confirmations ?

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forms of receivables confirmations ?

positive p 291

blank form

negative p 291

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Maintaining control of

the confirmation process

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alternative procedures --- p. 294

subsequent cash receipts

Or

Vouch from Acc Rec subsidiary ledger

to Invoice

to Shipping Doc

to Sales Order

to Customer Order or Purchase Order

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Valuation & allocation

Page 298

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Valuation & allocation

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Cash cut off 12-31-14

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Chris M

Cash Receipts JournalAre you going to audit the last 25 entries in CR Jnl the prior to 12/31/14

or

the first 25 entries in the CR Jnl after 1/1/15

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Chris S

cash receipts - will you

Vouch or Trace ?

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Manuel

cash receipts

other than cutoff

with which financial statement assertion are we most concerned if we are auditing cash receipts as of Dec. 31st?

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cash250

300450 200350 275550 100200 450

12/311/1 100 300

375 190190 320

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Colton

cash receipts

Vouching the last 25 entries in the cash receipts journal prior to 12/31/14 ?

Give an example of evidence that indicates the recorded balance is correct

48

Calvin

cash receipts

Vouching the last 25 entries in the cash receipts journal prior to 12/31/14 ?

Give an example of evidence that indicates the recorded balance is overstated

49

Amanda

Cash Disbursements Journalwill you audit the last 25 entries in the CD Jnl prior to Dec. 31st

or

the first 25 entries in the CD Jnl after Jan 1st 2015

50

Eric

cash disbursements

with which financial statement assertion (other than cutoff) are we concerned if we are auditing cash disbursements ?

51

cash250

300450 200350 275550 100200 450

12/31/20131/1/2014 300

190100 320375190

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Jennifer

cash disbursements

Vouching the first 25 entries in the cash disbursements journal after 1/1/2015 ?

Give an example of evidence that indicates the recorded balance is correct

53

Brian

cash disbursements

Vouching the first 25 entries in the cash disbursements journal after 1/1/2015 ?

Give an example of evidence that indicates the recorded CASH balance is overstated

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Accounts Receivable cut-off 12-31-14

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Anna

Accounts receivableAre you going to audit the last 25 entries prior to 12/31/14

or

the first 25 entries after 1/1/15

56

Cameron

will you

Vouch or Trace ?

57

PJ

what does the evidence indicate if we Vouch the last 25 entries in the Accounts Receivable account to shipping documents prior to 12/31/14

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Matt N

what does the evidence indicate if we Vouch the last 25 entries in the Accounts Receivable balance to shipping documents dated after 1/1/15

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shipping documentsaccounts receivables (& sales) cut-off

at the loading

dock

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shipping documents

2014 2015goods shipped in

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Melanie

do you want to audit the last 25 orders that were actually shipped prior to 12/31/14

orthe first 25 orders that were shipped on January 1, 2015

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Matt F

will you

Vouch or Trace ?

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Holly

what would the evidence indicate if you traced

the first 25 shipments of 2015

into the 2015 Accounts Receivable balance

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Megan

what would the evidence indicate if you traced

the first 25 shipments of 2015 into the 2014 Accounts Receivable balance

65

Donne

what opinion do we issue

while performing substantive tests you detect material misstatements that cause accounts receivable to be materially overstated

the client refuses to adjust their

financial statements

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JP

what does it imply about the effectiveness of the internal controls

while performing substantive tests you detect material misstatements that cause accounts receivable to be materially overstated

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