Substantive Tests: Accounts Receivable and Sales Assertions Valuation Procedures 1. Verify mathematical accuracy of A/R. a.

Obtain an A/R aged trial balance from A/R department personnel. b. Foot and cross-foot the trial balance. c. Compare total A/R per the trial balance to A/R in the general ledger. 2. Confirm year-end A/R and N/R balances with debtors. a. b. c. 3 cases when failing to confirm is justifiable: A/R is immaterial. Confirmations would likely be ineffective. Audit risk is acceptably low Usu. done at balance sheet date Can be done at interim when internal control is deemed effective and when the balances in A/R and sales accounts can be reconciled from the interim confirmation date. Positive confirmation account balance is listed in the confirmation and the customer will respond directly to the auditor about whether the balance is correct or not. Balances are relatively large Substantial numbers of inaccuracies or frauds expected. Mail more confirmations to non-respondents to maximize response rates. To customers who failed to respond, the auditor should perform alternative audit procedures such as examining: a. Subsequent cash collections to determine whether the customer paid b. Shipping documents to determine whether goods were whipped to the customer c. Sales invoices to determine whether the customers was billed. Negative confirmation debtor respond to the auditor only if the balances in an attached statement is incorrect. Internal control is adequate Balances are small Auditor has no reason to believe that debtors will not return the confirmation request. Should be mailed using the auditors envelope Negative N/R confirmation not usu. used in practice. Test cut-off to determine whether sales and receivables are recorded in the proper accounting period. Whether sales are recorded in the same period that title to the goods passed to the customer. Examine a sample of sales transactions recorded at or near the B/S date. Timing of revenue recognition and offers evidence of earnings manipulation. Review the collectability of receivables, and determine the adequacy of ADA. Determining the adequacy of an entitys ADA. Examining A/R aged trial balance Discussions with Credit Department personnel Reviewing post-B/S date collections

Existence/Rights/ Valuation

Existence/Occurrence/ Completeness

3. 4.

Valuation/Rights

Existence/Occurrence/ Completeness/Valuation

Reviewing available correspondence with delinquent debtors Examining credit ratings. 5. Perform analytical procedures to determine whether recorded sales and A/R balances appear reasonable. To direct the auditors attention to accounts that appear unusual or unreasonable, hence, additional substantive test of details. 6. Review F/S to determine whether: a. A/R, N/R and sales are properly classified and described. b. Disclosures are adequate.

Presentation and Disclosure