14 Receivables

Question 1

Receivables are usually audited using a combination of t_______ and a______ procedures

Answer 1

Receivables are usually audited using a combination of tests of details and analytical procedures

Question 2

Assertions about classes of transactions and related disclosures

Answer 2

– All sales transactions recorded have occurred and relate to the entity (occurrence) – All sales transactions that should have been recorded have been recorded (completeness) – Amounts relating to transactions have been recorded appropriately (accuracy) – All transactions have been recorded in the correct period (cut-off) – All transactions are recorded properly (classification) – All disclosed events and transactions relating to receivables have occurred and pertain to the entity (occurrence, rights and obligations) – All disclosures required have been included (completeness) – Financial information is appropriately presented and described and disclosures clearly expressed (presentation) – Financial and other information is disclosed fairly and at appropriate amounts (presentation

Question 3

Assertions about account balances at the period end and related disclosures

Answer 3

– Recorded receivables exist (existence) – The entity controls the rights to receivables and related accounts (rights and obligations) – All receivables that should have been recorded have been recorded (completeness) – Receivables are included in the accounts at the correct amounts (accuracy, valuation and allocation) – All disclosures required have been included (presentation) – Financial information is appropriately presented and described and disclosures clearly expressed (presentation) – Financial and other information is disclosed fairly and at appropriate amounts (presentation)

Question 4

Explain segregating of responsibilities

Answer 4

Segregating responsibilities in this area is a very important control. One person should not be responsible for taking orders, raising sales invoices and receiving and recording monies from customers. The failure to segregate these duties could lead to a fraud such as teeming and lading (explained in Chapter 10) which would overstate receivables balances.

Question 5

One area in which the auditor may be able to make use of client controls is ?

Answer 5

One area in which the auditor may be able to make use of client controls is over the completeness of sales, where the client performs a reconciliation between sales records outside of the accounting system and the sales in the financial statements. However, if they are unable to test and rely on such controls, the auditor often uses samples of documents outside of the accounting system as a starting point for substantive tests of completeness. This might include testing completeness of sales by checking that there is an invoice for a sample of GDNs.

Question 6

AUDIT PLAN: RECEIVABLES AND REVENUE. Give examples of testing for completeness

Answer 6

 Agree the balance from the individual sales ledger accounts to the aged receivables’ listing and vice versa.  Match the total of the aged receivables’ listing to the sales ledger control account.  Cast and cross-cast the aged trial balance before selecting any samples to test.  Trace a sample of shipping documentation to sales invoices and into the sales and receivables ledger.  Complete the disclosure checklist to ensure that all the disclosures relevant to receivables have been made.  Compare the gross profit percentage by product line with the previous year and industry data.  Compare the level of prepayments to the previous year to ensure the figure is materially correct and complete.  Review detailed statement of financial position to ensure all likely prepayments have been included.

Question 7

AUDIT PLAN: RECEIVABLES AND REVENUE. Give examples of testing for Existence

Answer 7

 Perform a receivables circularisation on a sample of year-end trade receivables (see Section 3 for details of how to undertake the receivables circularisation).  Follow up all balance disagreements and non-replies to the receivables confirmation.  Perform alternative procedures for any exceptions and non-replies to the receivables confirmation, such as: – Review after-date cash receipts by inspecting bank statements and cash receipts documentation. – Examine the customer’s account and customer correspondence to assess whether the balance outstanding represents specific invoices and confirm their validity. – Examine the underlying documentation (purchase order, despatch documentation, duplicate sales invoice etc). – Enquire from management explanations for invoices remaining unpaid after subsequent ones have been paid. – Observe whether the balance on the account is growing and, if so, find out why by discussing with management.

Question 8

AUDIT PLAN: RECEIVABLES AND REVENUE. Give examples of testing for Rights and obligations

Answer 8

 Review bank confirmation for any liens on receivables.  Make enquiries of management, review loan agreements and review board minutes for any evidence of receivables being sold (eg to factors).

Question 9

AUDIT PLAN: RECEIVABLES AND REVENUE. Give examples of Accuracy, valuation and allocation

Answer 9

 Compare receivables turnover and receivables days with the previous year and/or with industry data.  Compare the aged analysis of receivables from the aged trial balance with the previous year.  Review the adequacy of the allowance for uncollectable accounts through discussion with management.  Compare the irrecoverable debt expense as a percentage of sales with the previous year and/or with industry data.  Compare the allowance for irrecoverable debts as a percentage of receivables or credit sales with the previous year and/or with industry data.  Confirm adequacy of allowance by reviewing correspondence with customers and solicitors.  Examine credit notes issued after year end for allowances that should be made against current period balances.  Examine large customer accounts individually and compare with the previous year’s balances.  For a sample of old debts on the aged trial balance, obtain further information regarding their recoverability by discussions with management and review of customer correspondence.  Review after-date cash receipts by inspecting bank statements and cash receipts documentation.  For a sample of prepayments from the prepayments’ listing, recalculate the amount prepaid to ensure that it has been accurately calculated

Question 10

AUDIT PLAN: RECEIVABLES AND REVENUE. Give examples of Cut-off

Answer 10

 For a sample of sales invoices around the year end, inspect the dates and compare with the dates of despatch and the dates recorded in the ledger for application of correct cut-off.  For sales returns, select a sample of returns documentation around the year end and trace to the related credit entries.  Perform analytical procedures on sales returns, comparing the ratio of sales returns to sales.  Review material after-date invoices, credit notes and adjustments and ensure that they are recorded correctly in the relevant financial period.  For a sample of sales invoices, compare the prices and terms to the authorised price list and terms of trade documentation.  Test whether discounts have been properly applied by recalculating them for a sample of invoices.  Test the correct calculation of tax on a sample of invoices.

Question 11

AUDIT PLAN: RECEIVABLES AND REVENUE. Give examples of Classification

Answer 11

 Take a sample of sales invoices and examine for proper classification into revenue accounts.

Question 12

AUDIT PLAN: RECEIVABLES AND REVENUE. Give examples of Occurrence

Answer 12

 For a sample of sales transactions recorded in the ledger, vouch the sales invoice back to customer orders and despatch documentation

Question 13

AUDIT PLAN: RECEIVABLES AND REVENUE. Give examples of Occurrence and rights and obligations

Answer 13

 Determine, through discussion with management, whether any receivables have been pledged, assigned or discounted and whether such items require disclosure in the financial statements.

Question 14

AUDIT PLAN: RECEIVABLES AND REVENUE. Give examples of Classification

Answer 14

 Review the aged analysis of receivables for any large credits, non-trade receivables and long-term receivables and consider whether such items require separate disclosure.  Read the disclosure notes relevant to receivables in the draft financial statements and review for understandability.

Question 15

AUDIT PLAN: RECEIVABLES AND REVENUE. Give examples of Presentation

Answer 15

 Read the disclosure notes to ensure the information is accurate and properly presented at the appropriate amounts.

Question 16

It is worth noting that some of the audit procedures above test for more than one assertion. For example,

Answer 16

 Reviewing after-date cash receipts is an excellent test for both valuation and existence  Comparing the gross profit per product line with the previous year tests for the existence and completeness of receivables, as well as the occurrence and accuracy of sales and the completeness, occurrence, accuracy and classification of cost of sales

Question 17

A _____ of ____ is a major procedure, usually achieved by direct contact with customers. There are two methods of confirmation: p__and n__

Answer 17

A confirmation of receivables is a major procedure, usually achieved by direct contact with customers. There are two methods of confirmation: positive and negative

Question 18

E___ C__ are audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium.

Answer 18

External confirmations

Question 19

The verification of trade receivables by direct confirmation is the normal means of providing audit evidence to satisfy the objective of testing whether customers exist and owe bona fide amounts to the company (_e____and r__and o___).

Answer 19

The verification of trade receivables by direct confirmation is the normal means of providing audit evidence to satisfy the objective of testing whether customers exist and owe bona fide amounts to the company (existence and rights and obligations).

Question 20

Explain prima facie

Answer 20

Confirmation will produce for the current audit file a written statement from each respondent that the amount owed at the date of the confirmation is correct. This is, prima facie, reliable audit evidence, being from an independent source and in documentary form. The confirmation of receivables on a test basis should not be regarded as replacing other normal audit tests, such as the in-depth testing of sales transactions, but the results may influence the scope of such tests.

Question 21

Client’s mandate: whose job is it to send confirmations to the client.

Answer 21

Confirmation is essentially an act of the client, who alone can authorise third parties to divulge information to the auditors

Question 22

Explain positive and negative confirmation

Answer 22

A positive confirmation request is a request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information. A negative confirmation request is a request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request.

Question 23

When confirmation is undertaken, the method of requesting information from the customer may be either positive or negative. Explain the difference

Answer 23

 Under the positive method, the customer is requested to confirm the accuracy of the balance shown or state in what respect they are in disagreement.  Under the negative method, the customer is requested to reply only if the amount stated is disputed

Question 24

The negative method provides less persuasive audit evidence and shall not be used as the sole substantive procedure to audit receivables unless all of the following are present:

Answer 24

(a) The risk of material misstatement has been assessed as low. (b) The auditor has obtained sufficient appropriate audit evidence on the operating effectiveness of relevant controls. (c) The population consists of a large number of small, homogeneous account balances. (d) A very low exception rate is expected. (e) The auditor is not aware of circumstances or conditions that would cause customers to disregard the requests.

Question 25

How should the statement be prepared by the clients staff and why

Answer 25

The statements will normally be prepared by the client's staff, from which point the auditors, as a safeguard against the possibility of fraudulent manipulation, must maintain strict control over the preparation and despatch of the statements

Question 26

what should the letter look like

Answer 26

 The letter is on the client's paper, signed by the client.  A copy of the statement is attached.  The reply is sent directly to the auditor in a prepaid envelope.

Question 27

Auditors will normally only contact a sample of accounts receivable. If this sample is to yield a meaningful result it must be based on a complete list of all accounts receivable. In addition, when constructing the sample, the following classes of account should receive special attention to...

Answer 27

 Old, unpaid accounts  Accounts written-off during the period under review  Accounts with credit balances  Accounts settled by round sum payments  Accounts with large balances  Accounts with nil balance

Question 28

Define exception and non response

Answer 28

An exception is a response that indicates a difference between information requested to be confirmed, or contained in the entity's records, and information provided by the confirming party. A non-response is a failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a confirmation request returned undelivered.

Question 29

Auditors will have to carry out further work in relation to those receivables who:

Answer 29

 Disagree with the balance stated (positive and negative confirmation), resulting in exceptions  Do not respond, resulting in non-responses

Question 30

Give three reasons for exceptions:

Answer 30

There is a dispute between the client and the customer. The reasons for the dispute would have to be identified, and provision made if appropriate against the debt. Cut-off problems exist, because the client records the following year's sales in the current year or because goods returned by the customer in the current year are not recorded in the current year. Cut-off testing may have to be extended (see below). The customer may have sent the monies before the year end, but the monies were not recorded by the client as receipts until after the year end. Detailed cut-off work may be required on receipts

Question 31

Give three reasons for exceptions:

Answer 31

Monies received may have been posted to the wrong account or a cash-in-transit account. Auditors should check if there is evidence of other mis-posting. If the monies have been posted to a cash-in-transit account, auditors should ensure this account has been cleared promptly. Customers who are also suppliers may net-off balances owed and owing. Auditors should check that this is allowed.

Question 32

Give 1 reason for exceptions:

Answer 32

Teeming and lading, stealing monies and incorrectly posting other receipts so that no particular customer is seriously in debt is a fraud that can arise in this area. Teeming and lading involves an employee first stealing the cash receipts from a receivable (receivable 1) and not recording the receipt against the customer account. Then the employee receives more cash from another receivable (receivable 2) and allocates it against receivable 1 in order to conceal the stolen funds. Similarly, they then allocate monies from receivable 3 against amounts owed from receivable 2, and so on. By allocating the funds in this way, there is only an apparent time lag on posting the receipt of cash, rather than an obvious uncollected debt. If auditors suspect teeming and lading has occurred, detailed testing will be required on cash receipts, particularly on prompt posting of cash receipts.

Question 33

What happens if the auditor says there are doubts as to the audit evidence

Answer 33

The ISA states that the auditor shall obtain further audit evidence to resolve any doubts about the reliability of a response to a confirmation request. This could include contacting the confirming party. If the auditor concludes that a response to a request is not reliable, they shall evaluate the impact of this on the assessment of the risk of material misstatement (including the risk of fraud) and on the related nature, timing and extent of other audit procedures.

Question 34

Completeness and occurrence of sales: A client is likely to have a great deal of information about company sales and should be able to explain any fluctuations and variances. Auditors should consider the following

Answer 34

The level of sales over the year, compared on a month-by-month basis with the previous year  The effect on sales value of changes in quantities sold  The effect on sales value of changes in products or prices  The level of goods returned, sales allowances and discounts  The efficiency of labour as expressed in sales or profit per tax per employee

Question 35

What is the direction of the completeness test

Answer 35

Since we are checking the completeness of recording of sales in the sales ledger, we cannot take a sample from the ledger because the sample would not include what has not been recorded.

Question 36

The negative method of receivables confirmation should only be used if the client has good internal controls and a small number of large customer accounts. True / False

Answer 36

False

Question 37

Give four examples of tests to verify prepayments.

Answer 37

 Verify by reference to invoices, cash book, correspondence.  Check calculations by reperformance.  Review detailed statement of financial position to ensure all likely prepayments have been included.  Use analytical procedures to review reasonableness.