SUBSTANTIVE TESTS: SALES AND COLLECTIONS CYCLE

1
CHAPTER 13

• SUBSTANTIVE TESTS SALES AND COLLECTIONS CYCLE

2
METHODOLOGY FOR TESTS OF BALANCES

• MATERIALITY
• AR IS USUALLY MATERIAL
• INHERENT RISK
• INHERENT RISK IS MODERATE OR LOW FOR MOST
  ASSERTIONS
• CONTROL RISK
• MOST COMPANIES HAVE REASONABLE CONTROLS OVER
  RECEIVABLES

3
BALANCE-RELATED OBJECTIVES

• ACCURATE RECORDS
• EXISTENCE
• COMPLETENESS
• ACCURATE BALANCES
• PROPER CLASSIFICATION
• CUTOFF
• REALIZABLE VALUE
• RIGHTS
• PRESENTATION AND DISCLOSURE

4
STEPS IN AUDIT OF AR

• SET MATERIALITY
• ASSESS CONTROL RISK
• DESIGN AND PERFORM TESTS OF CONTROL AND
  SUBSTANTIVE TESTS OF TRANSACTIONS
• DESIGN AND PERFORM ANALYTICAL PROCEDURES
• DESIGN AND PERFORM TESTS OF DETAILS OF BALANCES

5
TESTS OF DETAILS OF BALANCES

• AGREEMENT OF DETAIL TO RECORDS
• EXISTENCE CONFIRMATION
• COMPLETENESS DIFFICULT TO AUDIT
• ACCURACY OF AR CONFIRMATION
• CLASSIFICATION CREDIT BALANCES
• CUTOFF END OF PERIOD TRANSACTIONS
• SALES CUTOFF
• SALES RETURNS CUTOFF
• CASH RECEIPTS CUTOFF
• REALIZABLE VALUE
• RIGHTS
• PRESENTATION AND DISCLOSURE

6
CONFIRMATION OF AR

• AICPA REQUIREMENTS
• CONFIRMATION DECISIONS
• TYPE OF CONFIRMATION
• POSITIVE
• NEGATIVE
• TIMING
• INTERIM
• YEAR-END
• SAMPLE SIZE
• SELECTION OF ITEMS
• MAINTAIN CONTROL
• NONRESPONSES