Flashcards in Accounts Receivable and Revenue Deck (38):
If a client's receivable balance has increased because of a general weakness in local economic conditions. What would the auditor likely do?
expand substantive tests of collectability
How is the A/R turnover statistic determined?
net credit sales / average receivables
Which management assertion is being when the auditor analyzes the aging schedule of A/R?
the overall valuation of A/R including provision for bad debt allowance
In auditing A/R and revenue, what are some potential internal control problems that could exist that would created material misstatements?
a specific account is collected, but cash is stolen, later the account is written off as uncollectable
incorrect year-end cutoff
inaccurately billed customers
undisclosed sales to related parties
shipments of goods on consignment recorded as sales
Why would a company report sales transactions that are false?
actual company revenues and net income are below forecasts and market expectations, and reported company financial performance is important for maintaining credibility in investor circles
employee income is based on bonuses, which in turn are based on reported company profitability
the company plans to issue equity or debt securities
What departments are involved when a company receives an order from a customer for an item of inventory and then that same company ships the merchandise and records the transactions?
sales department - takes the order and records all needed information
credit department - verifies that the customer should be given credit
warehouse - gathers merchandise and delivers it to shipping department
shipping - in charge of sending goods to customers
billing - reconciles documentation and sends sales invoice to customer
A/R - maintains subsidiary ledger indicating customer balance
collections - follows up on invoice by sending reminders to the customer
What documents are generated by the sales department? the credit department? shipping department? billing department?
sales - sales confirmation and possibly the internal order form
credit - marks approval on the internal customer order
shipping - bill of lading
billing - sales invoice
An auditor takes a sample of transactions recorded after year end, to verify these transactions are being reported in the proper period,. What assertion is the auditor testing?
An auditor takes a sample of transactions recorded just before year end, to verify these transactions are being reported in the proper period,. What assertion is the auditor testing?
occurrence and cutoff
What is the first procedure that the sales department does when it receives a customer's order?
prepares a confirming sales order form with pertinent information
What does the sales department do after the sales order document is completed?
1. Have the document reviewed and authorized or approved by an appropriate party
2. Record the essential info on the document, if needed. In an IT environment, this step is probably not necessary, as this work has already taken place via the computer program.
3. File a copy of the document in case follow-up is needed later
4. Forward the remaining copies of the document to the necessary parties or departments
When an independent auditor sends out confirmations of accounts receivable balances, what management assertion is being tested?
How does the credit department judge whether or not to approve open account credit for a particular sales order?
payment history of the customer
current balance and age of the customer's open sales orders
Which department receives the approved customer order? What action is taken?
transmitted to the warehouse where merchandise is gathered for delivery to the shipping department
At the time of delivery to the shipping department, what three events should occur?
count the goods
check the condition of the goods is appropriate
verify that the goods agree with the description listed in the related documentation
When the goods are shipped, what should the shipping department do?
prepare a bill of lading
Who receives copies of the shipping documents when the customer's order is shipped?
bill of lading and shipping document sent with merchandise
bill of lading may also be mailed to customer
shipping document forwarded inventory
customer order retained in shipping
customer order, shipping document and bill of lading sent to billing department
which department receives a copy of all customer orders and shipping documents for reconciliation and invoicing purposes?
Once a sales invoice is prepared, what activity takes place next in the billing department?
each invoice becomes an entry in the sales journal
Who receives a copy of the sales invoice?
What are the major functions of the A/R department?
keep a record of the individual amounts owed by each individual customer
keep a record of the age of each customer's account
send notices to customers if accounts are overdue
secure authorization to turn slow-paying customer accounts over the collections department
if the collections department deems a specific customer account to be noncollectable, what activity occurs?
it is reviewed by an independent party before write-off is approved
What testing of A/R should be performed during the subsequent period?
cash collections of receivables reported at year-end corresponding to balances that were reported
accounts actually written off as being uncollectible
sales returns and allowances on year-end A/R items
What management assertion is being tested when an auditor starts with transactions at their inception?
completeness and accuracy
What management assertion is being tested when an auditor starts with a reported account balance and seeks substantiation for it?
existence and rights and obligations
During an audit, which document should be used to determine when an A/R item and a sales transaction should be recorded?
the date of the sales invoice, the bill of lading and the shipping document, supported by the customer's purchase order
What are some reasons A/R confirmations might be returned with exceptions, which may require investigation and resolution by the auditor?
payment was made by the customer prior to the end of the reporting period but wasn't recorded
shipment of the merchandise was not made until after the end of the reporting period
goods have been shipped on consignment so no actual sales transactions has actually occurred
the actual A/R balance is in dispute
What are some reasons A/R confirmations might be returned with exceptions, which may not require investigation and resolution by the auditor?
payment was made by the customer, but it was not received by the reporting entity until after the end of the reporting period
the goods were shipped to the customer FOB shipping point and were in transit at the end of the year
the account was temporarily in disputer until certain info was sent to the customer. this info has now been sent, and the account balance is no longer in dispute
a sales transaction was posted to an incorrect customers account due to error but has been resolved
what management assertion is being tested when the auditor reviews a client's credit approval process?
What are the different types of confirmation?
How does an auditor decide which confirmation to use?
positive - more effort and cost more. used when more risk, material balances, and/or older balances
negative - risk levels are low, balances are small, homogeneous and relatively low
When would an auditor place less reliance on confirmations in the testing of A/R?
when the balance is small
when it is felt that customers will not respond
What alternative procedures can the auditor apply that may provide satisfactory audit evidence?
review cash collections after year end
What are the steps in the A/R confirmation process?
the auditor selects the customer accounts to be confirmed based on certain criteria
either the auditor or the reporting company prepares the confirmation form
a rep of the company must sign the confirmations
the auditor mails the confirms with an envelope for response directly back to the auditor
the auditor review all returned responses and considers exceptions noted
A confirmation request is returned by fax instead of the mail, what should happen next?
the auditor contacts the customer and ask the confirmation be returned in the mail
What is the auditor concerned about in connection with positive confirmations not returned? What should the auditor do if they are not returned?
the concern is that the customer does not exist and the receivable are fictitious
the auditor can do several things
mail second confirmations
call the customer
review the credit file to make sure that there is adequate documentation of the customer's existence
review subsequent cash payments and the documentation generated in connection with those recent transactions
when is the confirmation of receivables normally performed?
as close the balance sheet date as possible