Chapter 11: Accounts

auditors are especially interested in receivables associated with

related party

Receivable, Notes Receivable, these generally are made for the benefit for the borrower rather
than the company

and Revenue Sources and Nature of Notes Receivable

notes receivables are written promised to pay certain amounts at future dates
Course ACC5400
used for handling transactions of substantial amounts
Status Done
for banks and financial institute, these are the single most important asset
This chapter discusses: an installment. note or contract may be used in an exchange that grants
receiving orders from customers possession of good to a purchaser

providing and billing merchandise or services to customers permits the seller to retain a lien of the goods until the final installment
under the note has been received
recording and collecting accounts receivables
used in sale of industrial machinery, farm equipment and automobiles

Receivables and Revenue other transactions that lead to the creation of a notes receivable include

disposal of plants and equipment

Sources and Nature of Accounts Receivable the sale of divisions of a company
the vast majority a companyʼs receivables are trade receivables taht arise from the issuance of capital stock
credit sales of goods or services to customers
the making of loans to officers, employees and affiliated companies
these are relatively large in number and should appear as seperate items
at their net realizable value
The Auditorsʼ Objectives in Auditing Receivables and
accounts receivables can also include other items such as Revenue
loans to officers the auditors objectives in the audit of receivables and revenue are to
loans to subs use the understanding of the client and its environment to consider
claims against other firms inherent risk, related to receivables and revenue

claims for tax refunds obtain an understanding of internal control over receivables and revenue

advances to suppliers assess the risks of material misstatement and design of tests of controls
and substantive procedures that
 substantiate the existence of receivables and the occurrence of as a result, management should make a commitment to competence
revenue transactions especially for key financial and accounting personnel

establish the completeness of receivables and revenue transactions managements commitment to integrity and ethical values as indicated by its
attitude toward financial reporting
verify the cutoff of revenue transactions
management should also do background checks of prospective employees
determine that the client has rights to recorded receivables
and obtain fidelity bonds on employees in position of trust
establish the proper valuation of receivables and the accuracy of
revenue transactions
Risk Assessment
determine that the presentation and disclosure of information about
risk assessment involves identification, analysis and management of risks
receivables and revenue are appropriate
relevant to achieving the organizations objectives
including the classification of receivables into appropriate
in relation to the revenue cycle, management should develop a formal process
categories, adequate reporting of any receivables pledged as
of monitoring external factors
collateral
economic conditions, competition, customer demand, and regulations
because of the joint relationship between AR and revenue, the two can best be
considered jointly internal factors should also be considered

revenue recognition involves many accounts and thus this is an area of changes in accounting principles, introductions of new products and
high risk for auditors services and the use of new types of sales contracts

Internal Control of Accounts Receivable and Revenue Revenue Cycle—Accounting System and Control
to understand internal control over AR  auditors should consider the various
Activities
components internal control over sales is strengthened by a division of duties so that
different departments or individuals are responsible for
Control Environment preparation of the sales order
risk of intentional misstatement of revenues, the control environment is very credit approval
important to effective internal control over revenue
issuance of merchandise from stock
effective board of directors is of particular importance as they provide
shipment
judgement over managements revenue recognition process
biling
strong internal control should be established and incentive for
fraudulent reporting should be invoice verification

appropriate revenue recognition involves complex accounting principles, maintenance of control accounts
estimates and computations
maintenance of customerʼs ledgers
 approval of sales returns and allowance once the customer has been granted a line of credit, at every new purchase it
is determined whether or not the customer has sufficient unused credit
Controlling customers orders
process is often performed by the IT system
very important process and should be designed carefully
if the client does not have enough credit, either credit is extended or other
important intital steps include
methods are implemented such as cash on delivery
reviewing items and quantities to determine if the order can be fulfilled
Issuing Merchandise
within a reasonable amount of time
companies with standard products maintain a finished goods storeroom
prepare a sales order
supervised by a storekeeper
sales order is a translation of the terms of the customers order into a
the storekeeper issues the goods covered by the orders to the shipping
set of specific instructions for the guidance of various division,
department after the order has been approved by the credit department
including the credit, finished goods stores, shipping, billing and
accounts receivables units perpetual inventory records are kept by the accounting department not
this storekeeper

The Shipping Function

the shipping department must arrange for shipping methods

bills of landing are created when the goods are loaded into cars or rucks

the shipping documents are numerically controlled and are entered in a

shipping register before being forwarded to the biling department

Credit Approval

before the sales order is processed, the credit department must determine
whether goods may be shipped to the customer on open account

the credit department is supervised by a credit manager who reports to the

treasury department

they implement managements credit policies and used them to evaluate

prospective and continuing customers
The Billing Function if manual

sales invoices are created to notify the customer of the amount due for goods controls might consist of second person review for the accuracy of
and services delivered prices, credit terms, transport charges, extensions and footing

a department not under the control of sales should perform billing and are if IT based
generally assigned to a separate section within accounting, data
controls are placed by implementing input validation (edit) checks and
processing or the finance department
various processing controls
if a manual process is used, the billing section has the responsibility of
Collection of Receivables
accounting for the serially numbered shipping documents
the cashier will control and deposit checks
comparing shipping documents with sales order s and customers
the remittance advices or a listing of receipts will then be forwarded to the
purchase orders and change notices
AR section of the data processing department
entering pertinent date from these documents on the sales invoice
they will then record them in the appropriate accounts
applying prices and discounts from price lists to the invoice
the total reduction in AR will be posted periodically to the general ledger from
making the necessary extensions and footings the cash receipts journal

accumulating the total amounts billed an aged trial balance of customers accounts should be prepared at regular
intervals for use by the credit department in carrying out its collection program
under FASB, revenue should be recognized when
this schedule also aids in the determination of an appropriate allowance
the contract performance obligations are met
for doubtful accounts
it is probable that the portion of the contract price allocated to the
Controls over Revenue Estimates
performance obligation is collectible
if amounts of revenue recognized must be estimated, effective controls over
sales invoices are created by the IT department as well as an electronic sales
estimating should be established such as:
transactions files which is used with the cash receipts transactions to update
the master file of AR control environment policies and procedures that encourage proper
estimates
prices and amounts charged are either entered by personnel or collected
from a master list of authorized prices risk assessment policies that consider the risks of inappropriate selection
or application of revenue recognition principles
periodically, the IT system updated the general ledger and prints sales
journals and sub ledger of AR policies that ensure that competent personnel are involved in developing
the revenue estimates including those that have an understanding of
the computer also generates monthly statements for mailing to the
revenue recognition accounting standards, contract terms, characteristics
customers
of customers and economic conditions
controls should be placed to ensure the accuracy of the invoices before they
are mailed out to the customers
 policies and procedures that ensure that relevant, sufficient and reliable the credit manager should initiate the process of uncollectible receivables
data are considered in the development of the revenue estimates write-off with the subsequent authorization by the treasurer

management review and approval of sources of data, processes used to receivables that are written off should then be either
develop the assumptions, changes in the methods used and the
turned over to a collection agency
reasonableness of assumptions and revenue estimates
retained and transferred to a separate ledger and control account
policies to improve estimation processes by comparison or prior revenue
estimated with actual revenue realized the records maybe of a memo form rather than regular accounting
records
Adjustments to Sales and Receivables

all adjustments to sales should be supported by serially numbered credit

memoranda signed by an officer or responsible employee having no duties
relating to cash handling or to the maintenance of customer ledgers

Monitoring
management review controls

a major type of monitoring controls for revenue and receivables

appropriate controls here involve reviewing various types of performance

reports such as sales and gross margin by product line, by major
customer, by geographic area and by sales person

review aging of various accounts and may solicit feedback from customer
about the accuracy of billings

internal auditors may also contribute to the monitoring process

they may send confirmations and investigate discrepancies identified

 they may also perform extensive reviews of shipping reports, invoices, analysis of other AR
cash receipts, credit memoranda and aged TB of AR to determine if the
analysis of notes receivables and related interest
prescribed control activities are being carried out
analysis of allowance for uncollectible accounts and notes

Internal Control over Notes Receivable comparative analysis of revenue by month, by product, by territory or by
relating forecasted revenue to actual revenue
internal controls as related to notes receivable requires that;
documentation of internal controls
the custodian of notes receivable not have access to cash or to the
general accounting records risk analysis and audit plan or program

the acceptance and renewal of notes be authorized in writing by a

responsible official who does not have custody of the notes Audit of Receivables and Revenue
the write off of defaulted notes be approved in writing by responsible
the following steps indicate the general pattern of work performed by the
officials and effective procedures adopted for subsequent follow up of
auditors in the verification of receivables and revenue
such defaulted notes
A. Use the understanding of the client and its environment to consider inherent
partial payment risks , including fraud risks, related to receivables and revenue
the abstraction of cash receipts is sometimes concealed by failing to make B. Obtain an understanding of internal control over receivables and revenue
an entry to record receipt of a partial payment on a note
C. Assess the risks of material misstatement and design further audit
satisfactory control over the recording of partial payments require that the procedures
date and amount of the payment and the new unpaid balance should be
D. Perform further audit procedures
recorded and maintained by the accounting system
 examples of tests of controls
internal control may also be strengthened by the preparation of monthly
reports summarizing notes receivable transactions during the month and items a test the controls over sales transactions by examining the process
outstanding at month end of recording the transactions

should be created by someone other than those who have custody of the b trace details of shipping documents to related sales invoices
assets c review the use and authorization of credit memo

d dest controls for OTC sales by reconciling cash register records or

Audit Documentation for Receivables and Revenue
sales tickets with sales journals
besides preparing lead schedules for receivables and net revenue, the
e test management review controls
auditors obtain or prepare the following working papers
f test controls over estimates related to revenue and receivables
ages TB of trace AR
 if necessary, revise the risks of material misstatement based on the
usually a computer print out
results of tests of controls
E. Perform further audit procedures - substantive procedures for receivables
and revenue

 obtain an aged trial balance of trade accounts receivables and analyses

of other accounts receivables and reconcile to ledgers

 obtain analyses of notes receivables and related interest and reconcile

to the general ledger

 inspect notes on hand and confirm those with holders

 confirm receivables with debtors

 perform analytical procedures for AR, NR and Revenue

 review significant year-end sales contracts for unusual terms

 review the year-end cutoff of sales transactions

 test the valuation of notes receivables, computation of interest income,

interest receivable and amortization of discount or premium

 evaluate the propriety of the client accounting methods for receivables

and revenue

 evaluate accounting estimated related to revenue and receivables

 determine the adequacy of the clients allowance for uncollectible

accounts
it is also essential for auditors to have a thorough understanding of the clients
 ascertain whether any receivables have been pledged business; regarding revenues and receivables this understanding includes:
 investigate any transactions with or receivables from related parties the types of products and services sold
 evaluate the business purposes of significant and ususual sales the classes and categories of the clients customers
transactions
whether the business is affected by seasonal or cyclical demand
 evaluate financial statement presentation and disclosure of receivables
level of competition in the industry
and revenues
typical marketing policies for the client and its industry

contract terms including pricing, sales returns, discounts, extension of

credit and normal delivery and payment terms
A. Use the understanding of the client and its environment to B. Obtain an understanding of internal control over receivables
consider inherent risks , including fraud risks, related to and revenue
receivables and revenue auditors consideration of controls over receivables and revenue may begin
the auditors use their understanding of the clients environment to assess the with the preparation of a written narrative description or flow chart with the
inherent risks for the assertions about receivables and revenue completion of the internal control questionnaire

auditors face a number of potential risks related to this arising from business after the description of the controls are prepared, auditors will determine if
risks that are faced by managers such as they are implemented

a decline in sales due to economic declines, product obsolescence, done through observation and walkthroughs
increased competition or shifts in product or service demand

inability to collect receivables

improper revenue recognition

restrictions placed on sales by laws and regulations

risks of material misstatement also arise from fraud as this is the most
common technique used by management to engage in fraudulent financial
reporting

thus making audit of revenue and receivables an area of significant risk for
auditors - they are to ordinarily presume that there is high fraud risk in all
audits related to revenue

due to this, auditors should

first:

understand the controls established by management to control the risk

determine whether the controls are implemented

then design their responses to the risk which can be in the form of:

the response that has an overall effect on how the audit is conducted

a response involving the design of audit procedures

a response involving performing procedures to further address the risk

of material misstatement due to managements override of internal
control
 if tests of controls are needed, those procedures are also designed

in essence, auditors are trying to identify what could go wrong to cause

receivables and revenues to be materially misstated

in this process significant risks could also be identified, in which case the
auditor should

evaluate the design of the related controls and determine that they are
implemented

perform substantive procedures

test the operating effectiveness of controls in the current period when

they plan to rely on those controls

C. Assess the risks of material misstatement and design further

audit procedures
after considering the information about the client and its environment, auditors
then assess the risks of material misstatement at the financial statement and
assertion levels

financial statement level

they assess whether the identified risks have

pervasive effect on the financial statements and require an overall

response

effects on individual financial statement assertions

at the assertion level

the auditors identify relevant assertions and design appropriate further

audit procedures in response
 the size of the sample can be determined by either a statistical or
non-statistical sampling technique

example  Manufacturing companies

testing can begin with the comaprison of the customers purchase

order, the clients sales order and the duplicate copy of the sales
invoice which are then traced to the related copy of the shipping
document

the credit managers signature denoting approval should be on

the sales order

in a manual system, mathematical accuracy should eb tested

as and the date on the invoice should be compared with the
date on the related shipping document and the date of entry in
the AR sub ledger

consistent pricing and sales discount policies are a necessary

element of good internal control over sales transactions

the policies should be discussed with management and should

create comparisons with price lists, catalogs and contracts
with customers to verify

Strong IT systems give auditors confidence in accurate transaction

recording.

Effective general controls (e.g., access controls) support

D. Perform further audit procedures proper authorization and approval of sales.

tests directed towards effectiveness of controls help to evaluate the clients Application controls are tested through:
internal control and determine whether the auditorʼs planned assessed levels Reconciliation of batch control totals
of control risk can be supported
Follow-up on exception reports
 examples of tests of controls
Observation of input validity tests through manual entry
a test the controls over sales transactions by examining the process of into the system
recording the transactions
Auditors may use test data to assess application control
to determine if the controls are functioning properly, the auditors may performance to ensure that the sales transactions are
decide to examine significant aspects of a sample of sales
transactions
 authorized, approved and supported by an electronic d test controls for OTC sales by reconciling cash register records or sales
document tickets with sales journals

auditors should also keep a lookout for items on consignment as in the audit of clients that make a substantial amount of OTC sales, the
they cannot be treated as sales auditors may compare selected daily totals is sales journal with cash
register readings or tapes
auditors should investigate the controls for sales to related parties
the serially numbered tickets for all sales should be accounted for
effective control over this often requires the same kind of
formal procedures for billing, shipping and collection functions e test management review controls
as for sales to outsiders
if management review controls are suitably designed, the auditors can
which need to be eliminated if consolidation occurs choose to test their operating effectiveness

b trace details of shipping documents to related sales invoices they will consider their relevance and precision

the preceding procedure does not disclose orders that had been relevance
shipped out but not billed
whether the controls address the appropriate financial
to obtain assurance that all shipments have ben billed, the auditors statement assertion
may select a sample of shipping documents issued during the year
precision
and compare these to sales invoices
the level of aggregation of data, the consistency of
particular emphasis shoulde placed upon accounting for all
performance and the predictability of management
shipping documents by serial number
expectations
for IT systems, generally this process should eb accurate and thus
generally involves inspecting documentation of performance of the
emphasis is placed on technique to ensure accuracy of recording
controls
shipments such as the use of scanning devices to register items
shipped f test controls over estimates related to revenue and receivables

c review the use and authorization of credit memo if estimates of significant amounts are required in revenue recognition,
auditors can evaluate and test the controls over estimate
all allowances to customers for returned or defective merchandise
should be supported by serially numbered credit memoranda signed competence of personnel
by an officer or responsible employee having no duties relating to reliability of data used to estimate
handling cash or maintenance of
management review and approval
good internal control here called for gods to be received and
this also applied to estimates of uncollectible amounts
examined before credit is issued
 if necessary, revise the risks of material misstatement based on the results
auditors should also perform tests of these documents to ensure all
of tests of controls
information is captured accurately
 after the procedures are completed, the auditors should reassess the a listing of individual customers accounts classified by the number of
extent of the risk of material misstatement for each financial statement days subsequent to billing by age
assertion regarding receivable and sales
a preliminary step in estimating the collectibility of accounts
this is then used to determine if the auditors should make any changes receivables
to their planned substantive procedures

when provided by the client, the auditor should also determine its
E. Perform further audit procedures - substantive procedures for accuracy
receivables and revenue  obtain analyses of notes receivables and related interest and reconcile to
 obtain an aged trial balance of trade accounts receivables and analyses of the general ledger
other accounts receivables and reconcile to ledgers

aged trial balance

 may be prepared by client staff confirmation of a receivable provides only limited evidence about the
completeness as acknowledgement does not mean that they can
information in this analysis would generally include
actually pay them
the maker, date, maturity, amount and interest rate
professional standards indicate that the auditors should confirm
these should also be traced back to their original documents accounts receivables unless
 inspect notes on hand and confirm those with holders accounts receivables are immaterial

the use of confirmations would be ineffective

the auditors assessment of the risks of material misstatement is

low and substantive procedures will be used instead

various risks involved in bot card-copy and electronic copy of

confirmations are

the information is sent to an inappropriate address and an

unauthorized personnel signs them
the inspection of notes receivable on hand should be performed with the improper intervention into the delivery of a confirm
count of cash to prevent the concealment of a shortage of cash for
misappropriated assets and vice versa information sent to the right place but inappropriate individual
responds
if the notes are held by others, confirmation in writing from the owner of
the note is considered an acceptable alternative to the inspection

still needs to be confirmed from the maker (not just the bank)

 confirm receivables with debtors

external confirmation

audit evidence obtained by the auditors as a direct written response to

the auditors confirmation request

direct communication with debtors often is the most essential an

conclusive step as the auditors are collecting audit evidence that

establish the existence and gross valuation of the asset positive and negative confirmation requests
provides some assurance that lapping or other manipulation there are two methods of confirming receivables by direct
affecting receivables is being carried on at the BS date communication with debtor:

positive confirmation requests

 a request in which the confirming party will directly verify if the restrictions in customers responses
information if accurate or not based on their records
depending upon its nature, it affects the reliability fo the information
also includes blank bank forms which is sent to the confirming and further procedures might be required
party to be filled out - better as the they fill it out rather than
alternative audit procedures for nonrespondents
just agreeing with the amounts sent
when responses are not received, the auditors should apply alternative
negative confirmation requests
procedures to the accounts unless
a request in which the confirming party will respond only if the
the amount of nonresponse is not significant when protected as a
balance shown is incorrect
100 percent misstatement to the total balance of receivables
generally cheaper but less reliable - used mostly in
there are no unusual characteristics related to the nonresponse
combination with positive if
the best alternative procedures is the examination of subsequent cash
romm is low
receipts in payment of the receivable
large number of small balances involved
may also involve things such as shipping documents, customer
low exception rate is expected purchase orders or sales invoices for the sales transactions making
up the order
low expectation of disregard by the recipients
the confirmation process in perspective
Size of Sample
risks also include customers verifying records without actually
in the audit of most companies, the confirmation process for accounts
comparing them
receivables is limited to a sample
reviewing and confirming accounts and notes written of as uncollectible
when selecting individual accounts to be confirmed, it is customary to
include all customers with balances above a selected dollar amount auditors should determine that these write-offs were properly
and to select a sample from the remaining ones authorized

managements refusal to allow the auditors to perform external auditors can also use analytical procedures to determine fi
confirmation procedures on particular accounts, amounts written off are reasonable

the auditor should evaluate managements reasons, evaluate the  perform analytical procedures for AR, NR and Revenue
implications of this refusal to assessment of romms and perform
alternative audit procedures designed to obtain relevant and reliable
audit evidence

may results in a disclaimer or qualified opinion

discrepancies in customers responses

auditors should resolve differences reported by customers

 identify possible fictitious revenue by searching for unusual or large
entries in revenue accounts

identify possible fictitious revenue by searching for entries into

revenue accounts from unusual sources

identify possible revenue cutoff errors by examining unusual revenue

transactions around year-end

identify related party transactions n the sales journal by selecting

unusual transaction throughout the year

identify possible duplicate billing by reviewing the sales journal for

sales of identical amounts to the same customers over a short period
of time
several rations and relationships can eb computed to indicate the overall
reasonableness of the amounts shows for AR, R and NR identify possible unauthorized sales discounts by comparing discounts
to individual customers in total and as a percentage of total sales
examples include

gross profit rate identify possible uncollectible amounts by identifying credit sales that
exceed the amounts of customerʼs credit authorization amounts
the ration of sales in the last month or week to total sales for the
identify misstatements of accounts receivable by identifying large
quarter or year
credits to accounts receivable from unusual sources
revenue in related to productive capacity
 review significant year-end sales contracts for unusual terms
units shipped in related to revenues and production records

accounts receivable turnover

the ratio of accounts receivable to the years net credit sales

the ratio of accounts written off during the year to the ending
balance of accounts receivable

the ratio of returns and allowances to sales

the ratio of interest revenue to notes receivable

the ratio of uncollectible accounts expense to credit sales

ledgers and journal can also be analyzed by data analytics software with
the goals being
 management may be inclined to modify the terms of the sales contracts at can promptly sell
near year end to boost sales
substantial revisions in the amounts to be received under sales
auditors should review any significant transactions for unusual pricing, contracts possibly indicating the application of inappropriate
billing, delivery, return, exchange or acceptance clauses accounting methods or misestimates of the amount of revenue to be
realized
 review the year-end cutoff of sales transactions
popular case of window dressing

 test the valuation of notes receivables, computation of interest income,

interest receivable and amortization of discount or premium

generally, revenue can be inappropriately increased by considering sales

actually made in january as part of the YE

generally detected by analytical procedures and by comparing sales

recorded for several days before and after the balance sheet date with
the duplicate sales invoices and shipping documents

control can be maintained if the responsibilities are divided among

various individuals unless a company elects the fair value option, notes receivables are values
auditors should be aware of and investigate at their outstanding face value plus or minus any unamortized premium or
discount
unusually large increases in the year end sales to a single customer or
few the working paper used to analyze notes should show the interest rate and
the date of issuance of each note
indicative of bill and hold transactions
the interest rate section of the working paper consists of four columns,
increases in revenue and receivables along with increases in gross which show the following information
profit margins that are inconsistent with the clients experience or
accrued interest receivable at the beginning of the year
industry averages

inappropriate changes in accounting principles that result in an taken from the preceding years audit working papers
increase in recorded revenue interest earned during the year
substantial sales returns following the balance sheet date that might computed from the terms of the notes
indicate sales to customers who didnʼt actually place them
interest collected during the year
also includes channel stuffing in which sales are boosted by
traced to cash receipts records
inducing customers to buy substantially more inventory than they
 accrued interest receivable at the end of the year in these situations revenue standards could be applied to a
portfolio instead
computed by the auditors
auditing revenue recognition
if the fair value option is used, the auditors should evaluate the
reasonableness of the inputs used audit procedures for revenue recognition involve obtaining
reasonable assurance that management has followed generally the
 evaluate the propriety of the client accounting methods for receivables and
appropriate accounting framework
revenue
auditors should also consider management review controls
especially when revenue recognition involves difficult

auditors should also understand the contracts of the sales, the

assumptions made and the credit worthiness of the customers.

they should also consider the history of collection of amounts

under similar contracts

problems that auditors might encounter in auditing revenue

recognition include

estimates of revenue recognized might not give consideration

to sales return rights that have been granted to customers

management or client personnel may have established formally

it is important for auditors to consider whether or not the client is
or informally side agreements that significantly alter the terms
recognizing revenue based on accounting guidance
of sale
FASB revenue recognition standard
cash receipts from franchise fees may be inappropriately
identify the contract recognized when services have not been rendered to the
identify the performance obligation franchises

determine the transaction price. bill and hold transactions may be recorded when they do not
meet the requirements for revenue recognition
allocate the transaction price to the performance obligations
notes receivable may not bear reasonable interest rates at the
recognize revenue when the performance obligations are satisfied time they are accepted
to use the previous steps, management must conclude that it is management of a construction contractor might overestimate
probable that the contract amounts will be collected or likely to the amount of revenue earned
be collected
management of a software company might sell goods and
if a large amount of good are sold to customer that have the services under a contract with multiple performance
same or similar terms and conditions
 obligations and inappropriately overload revenue recognized represents a significant accounting estimate for most organizations
on the performance obligations completed initially
retrospective review is necessary to determine the accuracy of
 evaluate accounting estimated related to revenue and receivables managements estimates

the process of auditing generally involves

evaluating managements process of developing the estimate

reasonableness and competence of the process

reviewing subsequent transactions

developing auditors own estimate and comparing the numbers

the following procedures may be used the auditors i8n developing an

estimate and evaluating the reasonableness of of managements estimates

compare the details of the aging of accounts receivables to prior years

aging

investigate the credit ratings for delinquent and unusually large

auditors are responsible for evaluating the reasonableness of accounting
accounts
estimates related to receivables and the recognition of revenue
review confirmation exceptions for an indication of amounts in dispute
sales returns, allowance for uncollectible amounts etc
or other clues as to possible uncollectible accounts
often done by reviewing and testing managements process
summarize in a working paper those accounts whose collectibility if
also consider the competence of employees and whether or not all doubtful based on the preceding procedures
conditions and factors have been considered
review with the credit managers the current status of significant
auditors are required to perform a retrospective review of the prior years doubtful accounts, determining the collection action is taken and the
significant accounting estimates and whether they indicate a bias on the opinion of the credit manager as to the ultimate collectibility
managements part
compute relationships such as the number of days sales in accounts
 determine the adequacy of the clients allowance for uncollectible accounts receivables and the relationship of the valuation allowance to AR and
net credit sales

data analytics may also be used

after this auditors will determine the reasonableness of

managements estimates of the allowance for uncollectible
accounts

 ascertain whether any receivables have been pledged

 transaction with customers or suppliers that have unusual terms

accounting records that for unusual balances or transactions

particularly those occurring near year end

if identified

the auditors should obtain an understanding fo the transactions,

determine whether the transactions have been approved by the board

auditors should inquire directly as to whether anyu notes of AR have been confirm the terms of the transactions with the related parties
pledged or assigned evaluate the collectibility of any receivables outstanding
pledging of receivables evaluate the ade1quacy of disclosure of the details of the transactions
to assign to a bank, factor, finance company or other lender an in the notes to FS
exclusive clain against accounts receivable as security for a debt  evaluate the business purposes of significant and unusual sales
should be be marked for auditors to check transactions

auditors shouldd also look for any pledged AR that are not marked as
such

 investigate any transactions with or receivables from related parties

related party transactions might be prohibited by federal or state law or by

the corporations by laws
auditors should e alert for significant and unusual transactions
to identify related party transactions, the auditors should review
certain procedures are dedicated to this such as
proxy and other filings with the SEC and other regulatory agencies
analytical and data analytic procedures
conflict of interest statements obtained by the company from its
management
 evaluate financial statement presentation and disclosure of receivables and
revenues

auditors should determine that the financial presentation of accounts and

notes receivable and the related disclosures are in accordance with
generally accepted accounting principles

related party receivables should be shown separately with disclosure of

the nature of the relationships and the amounts of the transaction

allowance for uncollectible accounts should be shown as a deduction

significant concentrations of credit risk arising from trade accounts should

be disclosed

Interim Audit Work on Receivables and Revenue

interim audit work

those audit procedures that are performed before the balance sheet date

the purpose is to facilitate earlier issuance of the audit report and to

spread the auditors work more uniformly over the year

procedures may include

consideration of controls

evaluation of the clients accounting methods

the confirmation of accounts receivables