CARLOS HILADO MEMORIAL STATE COLLEGE

COLLEGE OF BUSINESS MANAGEMENT & ACCOUNTANCY

Fortune Towne Campus, Bacolod City

PROJECT
IN
AUDITING

SUBMITTED BY:
Syjuco, Marie Antonette B. #24
BSAcT 4C
 AUDIT PROCEDURE FOR ACCOUNTS
RECEIVABLE
If your company is subject to an annual audit, the auditors will review its accounts
receivable in some detail. Accounts receivable is frequently the largest asset that a
company has, so auditors tend to spend a considerable amount of time gaining
assurance that the amount of the stated asset is reasonable.

Here are some of the accounts receivable audit procedures that they may follow:

 Trace receivable report to general ledger. The auditors will ask for a period-end accounts
receivable aging report, from which they trace the grand total to the amount in the
accounts receivable account in the general ledger. (If these totals do not match, you
may have a journal entry somewhere in the general ledger account that should not be
there)
 Calculate the receivable report total. The auditors will add up the invoices on the
accounts receivable aging report to verify that the total they traced to the general
ledger is correct.
 Investigate reconciling items. If you have journal entries in the accounts receivable
account in the general ledger, the auditors will likely want to review the justification for
the larger amounts. This means that these journal entries should be fully documented.
 Test invoices listed in receivable report. The auditors will select some invoices from the
accounts receivable aging report and compare them to supporting documentation to
see if they were billed in the correct amounts, to the correct customers, and on the
correct dates.
 Match invoices to shipping log. The auditors will match invoice dates to the shipment
dates for those items in the shipping log, to see if sales are being recorded in the
correct accounting period. This can include an examination of invoices issued after the
period being audited, to see if they should have been included in a prior period.
 Confirm accounts receivable. A major auditor activity is to contact your customers
directly and ask them to confirm the amounts of unpaid accounts receivable as of the
 end of the reporting period they are auditing. This is primarily for larger acco unt
balances, but may include a few random customers having smaller outstanding invoices.
 Review cash receipts. If the auditors are unable to confirm accounts receivable, their
backup auditing technique is to verify that customers have paid the invoices, f or which
they will want to review checks copies and trace them through your bank account.
 Assess the allowance for doubtful accounts. The auditors will review the process that you
follow to derive an allowance for doubtful accounts. This will include a consistency
comparison with the method you used in the last year, and a determination of whether
the method is appropriate for your business environment.
 Assess bad debt write-offs. The auditors will compare the proportion of bad debt
expense to sales for this year in comparison to prior years, to see if the current expense
appears reasonable.
 Review credit memos. The auditors will review a selection of the credit memos issued
during the audit period to see if they were properly authorized, whether they wer e
issued in the correct period, and whether the circumstances of their issuance may
indicate other problems. They may also review credit memos issued after the period
being audited, to see if they relate to transactions from within the audit period.
 Assess bill and hold sales. If you have situations where you are billing customers for sales
despite still retaining the goods on-site (known as "bill and hold"), the auditors will
examine your supporting documentation to determine whether a sale has actually ta ken
place.
 Review receiving log. The auditors will review the receiving log to see if it records an
inordinately large amount of customer returns after the audit period, which would
suggest that the company may have shipped more goods near the end of the audit
period than customers had authorized.
 Related party receivables. If there are any related party receivables, the auditors may
review them for collectability, as well as whether they should instead be recorded as
wages or dividends, and whether they were properly authorized.
 Trend analysis. The auditors may review a trend line of sales and accounts receivable, or
a comparison of the two over time, to see if there are any unusual trends. Another
possible comparison is of receivables to current assets. They may also measure the
average collection period. If so, expect them to make inquiries about the reasons for
changes in the trends.
 The preceding list of audit procedures is designed to detect a variety of audit risks,
which include the following:

 That receivables do not exist

 That recorded receivable balances are inaccurate
 That it may not be possible to collect accounts receivable
 That the derivation of the allowance for doubtful accounts may not properly reflect bad
debt experience
 That sales transactions were not processed in the correct periods
 That revenue was incorrectly recognized
 AUDIT PROGRAM FOR ACCOUNTS
RECEIVABLE
Risks
 The accounts receivable listing or individual balances may be inaccurate
 Accounts receivable balances may not exist
 Accounts receivable may not be collectible
 Bad debts write-offs may not be valid
 Sales transactions may be processed in the wrong period

Steps
1. Agree a detailed listing of accounts receivable to the summary
Obtain a detailed listing of accounts receivable balances (aged by customer, if possible) and:

a) Trace totals to the comparative summary of accounts receivable balances;

b) Select reconciling items in order to obtain a moderate to low level of assurance that accuracy
is achieved and
i) Trace these items to supporting documentation; and
ii) Determine whether the results of the client's investigations have been reviewed and
approved by a responsible official;

c) Test, to an extent to obtain a moderate to low level of assurance, the mathematical accuracy
of the detailed listing; and

d) If appropriate, examine support for any significant adjustments made throughout the year in
reconciling detailed accounts receivable records with the account(s) in the general ledger.

2. Positively confirm selected accounts receivable balances

Select customers' account from the detail accounts receivable listing for positive confirmation
in order to obtain a moderate to low level of assurance that the aforementioned audit
objectives are achieved. Perform the following:

a) Send positive confirmation requests under our control. Where appropriate, send itemized
statements to customers to facilitate responses. Second requests and, where warranted, third
requests should be mailed when responses to positive confirmation requests have not been
received within a reasonable time. When management requests us not to confirm certain
accounts receivable balances, consider whether there are valid grounds for such a request.
Before accepting a refusal as justified, examine any available evidence to support
management's explanations.

b) Summarize confirmation coverage.

3. Review confirmation replies

For confirmations returned:

a) Agree account information and account balance to detail listing;

b) Reconcile the account detail between the returned confirmation and the detail listing, where
applicable; and

c) investigate all reconciling items and determine whether any adjustments are necessary.

4. Test accounts where there is no confirmation

When confirmation is not carried out, or where it is not possible to confirm a selected amount
(including where confirmation requests are unanswered), select customer accounts from the
detail accounts receivable listing for verification and perform the steps outlined below in order
to obtain a moderate to low level of assurance that the aforementioned audit objectives are
achieved.

a) Compare subsequent remittances credited to accounts with remittance advices or other

receipts (e.g. deposit slips and bank statement) and ascertain that payments relate to the
account balances;

b) Examine documentation such as shipping documents, copies of sales invoices, customer sales
orders, and other relevant correspondence supporting the unpaid portion of the account
balances. Coordinate this test with the review of the collectability of overdue accounts; and

c) Consider whether it is necessary to verify further the existence of the customer.

5. Assess adequacy of allowance for doubtful accounts
To an extent based upon materiality and inherent risk, assess the adequacy of allowance for
doubtful accounts by performing the following procedures:

a) Obtain a list of accounts for which an allowance has been established. Review and test the
process used by management to develop their estimate of collectability;

b) Where provisions are made by the use of formulae based on the aged listing, determine by
reference to the details in our notes of the client's procedures whether the basis is:
i) Consistent with prior years;
ii) Appropriate to the circumstances of the business; and
iii) In accordance with the accounting policy;

c) Determine the effect, if any, of the client's policies and experiences regarding the timing of
the passage of title, sales returns and allowances where right of return exists, and bill and hold
situations; and

d) Discuss collectability with management and review other documentation supporting

collectability as necessary.

6. Review bad debt write-offs

Review, in order to obtain a moderate to low level of assurance that valuation is achieved, bad
debt write-offs by performing the following:

a) Consider the reasonableness of bad debt expense in light of the levels of bad debt write-offs
compared with prior years; and

b) Examine documentation relating to write-offs during the period and determine whether the
write-offs were properly authorized.
7. Test sales/accounts receivable cutoff
Accounts receivable cutoff testing is typically performed in conjunction with testing inventory
cutoff and may be tested in the Inventory audit area. If cutoff is tested in the Accounts
receivable audit area, perform the following:

Select sales and credit memoranda to obtain a moderate to low level of assurance that cutoff is
achieved by reviewing the cutoff at the time of inventory taking and at year-end (if different)
and performing the following:

a) For selected sales for periods before and after the cutoff date, examine the related records
of goods shipped and services performed to determine that the sales invoices are recorded as
sales in the proper period;

b) For selected credit (debit) memoranda for periods before and after the cutoff date, examine
the related records of returns and claims from customers to determine that the credit (debit)
memoranda are recorded in the proper period;

c) Determine whether there are unusually high volumes of returned goods after year-end; and

d) Consider unusual fluctuations in sales or return patterns before and after year-end and, if
present, review for possible cutoff errors.
What Is A Program?
A program is a document explaining a goal; who is responsible for achieving the goal, any
legal or binding requirements, and what the result will be. Programs might be tied to legal
regulations. They explain the overall system to both the employees and the outside
governing agency about what is done to address a topic. A program will outline how outside
agencies or other departments/people interface with your company. Programs state the
goal and then point to policy and procedure documents used to address the goal. If the
program were responding to a law, the text of the law should be included in the program
document. A program does not cover the small details. The program simply outlines who
does what and why. An example might be a Heat Illness Program.
What Is A Procedure?
A procedure describes the process of getting the work done or achieving a goal. Procedures
are described in training materials, such as guides, handbooks, checklists, on-the-job training
memos, etc. Procedures are normally instructions to employees describing exactly how to
implement policies or programs by stating precise steps that need to be followed. A heat
illness policy states that a manager must provide shade for employees, and a procedure
would state exactly how that shade is provided.