Shared Flashcard Set


Confirmations and A/R
Undergraduate 4

Additional Accounting Flashcards




Balance-related Audit Objectives for A/R
Existence – recorded A/R exist
Primary test: confirmation

Alternative procedures for non responses: examine subsequent cash receipts and supporting documents for evidence of shipment

Completeness – all existing A/R are included
-No testing usually done

-Rely on completeness of sales tests of transactions

Accuracy – A/R are accurate
Primary test: confirmation

-Alternative procedures for non responses: examine subsequent cash receipts and supporting documents for evidence of shipment

Classification – A/R are properly classified
Procedures: review aging of A/R for:
•    material credit balances
•    balance due from affiliates, officers, directors, other related parties

Cutoff – cutoff for A/R is correct (common to find misstatements here!)
Procedures: rely on timeliness objective tests of sales transactions

Realizable value – A/R is stated at realizable value
- Concern is with allowance for bad debts
- Procedures: analyze allowance by reviewing aging of A/R

- Detail tie-in – A/R in aged TB agrees with A/R master file and GL, and the total is correctly added
-Procedures: test foot the A/R aged TB, agree balance to GL and A/R master file
    - Trace a sample of balances to supporting documents to verify customer details, balance and aging of balance is correct

Rights – the client has rights to the A/R
        -Procedures: review BOD minutes, discuss arrangements with client, examine any contracts
        - Note that client customers usually do not know about such arrangements – so confirmation on this is not helpful

- Presentation and disclosure – properly done for A/R
        - Based on results of classification review, determine that F/S presentation and disclosure is adequate

Confirmations of A/R
SAS 67 (AU 330) generally requires confirmations unless one of the following is true:
-A/R is immaterial
-Confirmation would be ineffective because of low response rate or unreliable responses
-Combined IR and CR is low and substantive evidence can be collected that is sufficient

Confirmations: Are effective in discovering:

Fictitious accounts (existence)
Incorrect amounts (accuracy)
- May help in discovering:
Uncollectibles (valuation)

-Are not effective in discovering:
Omitted accounts (completeness) –Because we choose are samples from accounts with actual balances
Confirmation – 3 types per SAS 67 (AU330)
- Positive with a request for information to be supplied by the recipient (positive confirm = the recipient is requested to respond/return the confirm in all circumstances).

- Positive with the information to be confirmed included on the form.

- Negative confirm (negative = the recipient is requested to respond/return the confirm only when the information is incorrect).

Confirmation procedures
Select type of confirmation to send:
    Positive, blank
    Positive, completed
    Negative

- Auditor selects sample of customers with non-zero A/R balances to confirm

- Auditor prepares confirmations and has client sign them

- Auditor prepares for mailing or closely supervises client

- Auditor mails from a non-client location
    -Includes auditor on return address so any returned items are known by CPA
    -Includes self-addressed stamped reply envelope to assure delivery of responses

-Send second and third requests to non-responders to increase response rate (when using positive confirms)

Alternative procedures for non-responses
Subsequent cash receipts –
- Examine cash receipts journal and bank statements for evidence of payment after year end
- Note that this does not establish that the balance existed at the balance sheet date (so cutoff still could be a problem)
Examine sales invoice and BOL to establish issuance of invoice and date of billing/shipping to test cutoff and existence

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