Solution Manual Auditing Chapter 14 Boynton 8th Ed.

CHAPTER 14 AUDITING THE REVENUE C YCLE Learning Check 14-1 14-1..

14-. 14-.

a.

The The rev reven enue ue cycl cyclee incl include udess the the acti activi viti ties es invo involv lved ed in the the excha exchange nge of goods goods and and services with customers and the realization of the revenue in cash.

b.

The classes of transactions in this cycle for a merchandising company are sales, sales adjustments, and cash receipts. The primary accounts affected by these transactions are sales, accounts receivable, cost of sales, inventory, cash, cash, sales discounts, sales returns and allowances, bad debts expense, and allowance for uncollectible accounts

a.

!pecifi !pecificc audit audit object objective ivess for the revenue revenue cycle cycle are derive derived d from from the five five categor categories ies of management"s financial statement assertions.

b.

!pecific audit objectives for credit sales transactions include include the following# • $ecorded sales transactions represent goods shipped during the period %existence or occurrence&. • 'll sales transactions that occurred during the period have been recorded %completeness&. • The entity has the rights to receivables resulting from recorded credit sales transactions %rights and obligations&. • 'll sales transactions are correctly journalized, summarized, and posted %valuation or allocation&. • The details of sales transactions support their presentation in the financial statements including their classification and related disclosures %presentation and disclosure&.

14-(. )t may be appropri appropriate ate to allocate allocate a proporti proportionatel onately y larger larger share of of tolerable tolerable misstat misstatement ement to to accounts receivable because of high ris* of misstatements in this account and the high costs of applying certain procedures used in auditing receivables %such as sending and processing confirmation re+uests&. This simply means that the auditor chooses to allow relatively more of the total tolerable misstatement %financial statement materiality& remain undetected in accounts receivable where they are a re more costly to detect than misstatements in some other accounts. evertheless, tolerable misstatement misstatement must still still be sensitive to the amount of misstatement that might influence the decisions of financial statement users. 14-4. actors actors that might might motivate motivate management management to to deliberately deliberately misst misstate ate revenue revenue cycle asserti assertions ons include#

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14-1

•

•

3ressures to overstate revenues in order to report achieving an nounced revenue or profitability targets or industry norms that were not achieved in reality owing to such factors as global, national, or regional economic conditions, the impact of technological developments on the entity"s competitiveness, or poor manage ment. 3ressures to overstate cash and gross receivables or understate the allowance for doubtful accounts in order to report a higher level of wor*ing capital in the face of li+uidity problems or going concern doubts.

actors that might contribute to unintentional misstatements in revenue cycle assertions include# • The volume of sales, cash receipts, and sales adjustments transactions is often high, resulting in numerous opportunities for errors to occur. • The timing and amount of revenue to be recognized may be contentious owing to factors such as ambiguous accounting standards, the need to ma*e estimates, the complexity of the calculations involved, and purchasers" rights of return.

14-. a.

ollowing are example analytical procedures that the auditor might use to estimate total revenue for a household appliance manufacturer and for an airline. Industry 5ousehold 'ppliance fg.

• •

'irline

b.

Two analytical procedures that the auditor might use to estimate gross margin for company might include. Analytic Procedure /ompare historical trends in mar*et share and gross margin with current unaudited data. 7valuate the percentage of revenues coming from new products.

c.

•

Possible Analytical Procedures 6se past ratio of net sales to capacity with adjustments for capacity changes. 6se a combination of past ratios of mar*et share with adjustments of current changes in mar*et share. $e+uires *nowledge of the total mar*et size in the industry. 7stimate net revenues using information on utilization of capacity %airline seat miles& and average revenue per seat.

Audit Significance /ompanies with commanding mar*et shares often are able to obtain larger gross margins.

/ompanies with a high proportion of revenues from new products may earn premium gross margins due to the ability to innovate.

Two analytical procedures that the auditor might use to estimate net receivables and the allowance for doubtful accounts for company might include.

Analytic Procedure

Audit Significance

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14-

'ccounts receivable turn days

7valuate the entities history of uncollectible accounts expense to net credit sales, with adjustment for economic conditions

6nderstanding a company8s history of accounts and sales volume can assist the auditor in evaluating net receivables and the ade+uacy of the allowance for doubtful accounts. This procedure is primarily related to the ade+uacy of the allowance for uncollectible accounts. The above history of accounts receivable turn days would be most useful for evaluating estimating gross receivables given sales.

14-9. !everal control environment factors and their applicability to revenue cycle assertions are# • • •

•

14.:.

Integrity and ethical values - reduction of ris* of overstatement of revenues and receivables by eliminating incentives to dishonest reporting. /ommitment to competence - by chief financial officers and accounting personnel. Management's philosophy and operating style - conservatism in developing such accounting estimates as the allowance for uncollectible accounts and allowance for sales returns. Human resource policies and practices - bonding of employees who handle cash

The following table summarizes the functions that apply to credit sales transactions, the department that performs the functions, and the principal d ocuments or records produced in performing the function. Department that Principal documents and records Function performs function produced in performing the function. )nitiating credit !ales department ;ocuments sales /ustomer

14-(

Function ;elivering good and services

Department that performs function 2arehousing and shipping department for goods.

=ine operating departments for services.

$ecording sales

'ccounting %>illing&

Principal documents and records produced in performing the function. ;ocuments !hipping documents $eports of unfilled orders and bac* orders

/omputer iles and $ecords
14-@. )n order to assess control ris* as low based on programmed control procedures the auditor should test the following. Control 3rogrammed control procedures

/omputer general control procedures

anual follow-up procedures.

Importance to Control Risk Assessment )f a programmed control procedure in critical to a low control ris* assessment then the auditor should directly test the control procedure. )n order to obtain assurance that the progra mmed control procedure functions effectively throughout the period the auditor also needs to these the effectiveness of computer general control procedures. 3rogrammed controls usually report exceptions noted when performing the control. 's a result auditors also need to test the effectiveness of manual controls that follow-up on reported exceptions.

14-A. The following tables describes programmed controls for a typical manufacturing company. Potential Programmed Control CAA!s "Assuming !est Data# isstatement a. !ales invoices may The computer compares !ubmit test data for a not be recorded. entries in the sales journal transaction that has shipping with underlying shipping information, both with and information. 'll shipping without a supporting sales documents must be matched invoice. with a sales invoice.


14-4

Potential isstatement b. !ales invoice may be recorded in the wrong accounting period. c. ' fictitious sales invoice, or a sales transaction for which revenue should not be recognized, is recorded. d. !ales are made without credit approval.

e.

' sales invoice has incorrect +uantities or prices.

f.

!ales invoices may not be posted or may not be journalized

g.

!ales invoices may be posted to the wrong customer8s accounts.

Programmed Control

CAA!s "Assuming !est Data#

The computer compares dates on the sales invoice with dates on shipping documents. The computer will not prepare a sale invoice without underlying information on shipping files.

!ubmit test data with dates on sales invoices that both do and do not match with dates on related shipping files. !ubmit test data with sales invoice information that both is and is not supported by underlying shipping information.

The computer searches a field for appropriate credit authorization before an order is placed on an open order file. The computer matches +uantities on a sales invoices with underlying shipping information and matches prices with an authorized price list. The computer chec*s run-torun totals of beginning accounts receivable balances, plus sales transactions, with the ending receivable balances. The computer matches customer information on the sales invoice with the master customer file, the sales order, and the shipping documents.

!ubmit test data for sales orders that both are and are not supported by appropriate credit authorization. !ubmit test data for sales invoices that both do and do not match underlying shipping information and authorized price lists. !ubmit test data for batches that with complete and incomplete data sets in terms of completed transactions.

!ubmit test data with underlying information that both does and does not match with information on previously created sales order and shipping files.

14-10. ' common management control involves having managers with responsibility for sales to review daily or wee*ly sales reports to assess the reasonableness of recorded sales. urther management responsible for warehousing and shipping should review daily or wee*ly sales and inventory movement reports to assess the reasonableness of recorded sales and inventory removed from the perpetual inventory. 14-11. The sub-functions involved in cash receipts include %1& receiving cash receipts, %& depositing cash in ban*, and %(& recording the cash receipts.


14-

14-1. a.

Two important controls pertaining to cash sales and the transaction class audit objectives to which they relate are# • The customer"s expectation of a printed receipt and supervisory surveillance of over the counter sales transactions helps to ensure that all cash sales are processed through the cash registers or terminals - completeness. • )ndependent chec* by supervisor on the accuracy of cash count sheets, and verification of agreement of cash on hand with totals printed by a cash register or terminal - existence or occurrence and valuation or allocation.

b.

Two important controls pertaining to the initial handling of mail receipts are %1& immediate restrictive endorsement of chec*s received and %& preparation of a multicopy listing %prelist& of mail receipts.

14-1(. a.

' lockbox is a post office box that is controlled by the company"s ban*. The ban* pic*s up the mail daily, credits the company for the cash, and sends the remittance advices to the company for use in updating accounts receivable. This system eliminates the ris* of diversion of the receipts by compan y employees and failure to record the receipts.

b.

;epositing receipts intact daily means that all receipts are depositedB that is, cash disbursements should not be made out of undeposited receipts. This control reduces the ris* that receipts will not be recorded %completeness&, and the resulting ban* deposit record establishes the existence or occurrence of the transactions.

14-14. our controls that can aid in preventing or detecting errors or irregularities in recording cash receipts are summarized below along with potential tests of controls# Control )ndependent chec* of agreement of validated deposit slip with daily cash summary. /omputer chec* of information included in the cash receipts journal with information from prelist.

3reparation of periodic independent ban* reconciliations.

ailing of monthly statements to customers.

!est of Control )nspect a sample of daily cash summaries and examine evidence of agreement with validated deposit slip by responsible employee. 6se /''Ts to test computer matching of information from cash receipts journal with electronic prelist. 'lso follow-up on how exceptions are reported and examine evidence or correction of errors reported on exception reports. 7xamine a sample of periodic ban* reconciliations. a*e in+uiries about ban* reconciliation procedures and test accuracy on a sample basis.

14-9

14-1. a.

The functions pertaining to sales adjustments transactions are# granting cash discountsB granting sales returns and allowancesB and determining uncollectible accounts.

b.

The following three types of controls pertaining to sales adjustments transactions have as their common focus establishing the validity, or existence of occurrence, of such transactions# • 3roper authorization of all sales adjustments transactions. • The use of appropriate documents and records, particularly the use of an approved credit memo for granting credit for returned or damaged goods, and an approved write-off authorization memo for writing off uncollectible customer accounts. • !egregation of duties for authorizing sales adjustment transactions and handling and recording cash receipts.

14-19. a.

The transaction classes that should be considered in assessing control ris* for accounts receivable assertions are# credit sales, cash receipts, and sales adjustments.

b.

)n assessing control ris* for the existence or occurrence account balance assertion for accounts receivable, the following transaction class control ris* assessments should be considered# • 7xistence or occurrence for sales transactions that increase accounts receivable. • /ompleteness for cash receipts and sales adjustments transactions that decrease accounts receivable.

c.

' revised acceptable level of detection ris* for tests of details and a revised level of substantive tests must be determined for an assertion when the relevant final or actual inherent ris* assessments, control ris* assessments, and analytical procedure ris* assessments, differ from the planned assessed levels.

14-1:. )n vouching recorded accounts receivable transactions to supporting documentation, a sample of debits to customers" accounts is compared to d ata on supporting sales invoices and matching shipping documents, sales orders, and customer orders. The evidence obtained pertains primarily to specific audit objectives derived from the existence or occurrence, rights and obligations, and valuation or allocation assertions for accounts receivable. 14-1@. >oth the sales cutoff test and the cash receipts cutoff test pertain to accounts receivable. The sales cutoff test involves# • 7xamining shipping documents for several days before and after the cutoff date to determine the date and terms of shipment. • Tracing shipping documents to sales and inventory records to establish that the entries were made in the correct accounting period. • )nspecting invoices for a period of time before a nd after the cutoff date to ascertain the validity and propriety of the shipments and corresponding entries.


14-:

)n+uiring of management about any direct shipments by outside suppliers to customers and determining the appropriateness of related entries. )n performing a cash receipts cutoff test, the auditor may be present at the balance sheet date to personally observe the promptness of the cutoff. )n particular, the auditor determines that all collections received prior to the close of business are included in cash on hand or in deposits in transit and are credited to accounts receivable. 'lternatively, the auditor may review the daily cash summary and validated deposit slip for the last day of the yea r. •

>oth cutoff tests relate to the existence or occurrence and completeness assertions for accounts receivable.

14-1A. a.

)t may not be necessary to confirm accounts receivable when# • The balance is immaterial to the financial statements. • The use of confirmations would be ineffective as an audit procedure. • The auditor"s combined assessment of inherent ris* and control ris* is low, and that assessment, made in conjunction with the evidence expected to be provided by analytical procedures or other substantive tests of details, is sufficient to reduce audit ris* to an acceptably low level for the applicable financial statement assertions.

b.

actors to be considered in choosing the form of confirmation re+uest are %1& the acceptable level of detection ris* and %& the composition of the customer balances. The positive form is used when detection ris* is low or individual customer balances are relatively large. The negative form should be used only when all three of the following conditions apply# • The acceptable level of detection ris* for the related assertions is moderate or high. • ' large number of small balances is involved. • The auditor has no reason to believe that the recipients of the re+uests are unli*ely to give them consideration.

c.

2hen no response is received after the second or third positive confirmation re+uest to a customer, the auditor should apply such alternative procedures as %1& examining subse+uent collections and %& vouching open invoices comprising the customer"s balance. 'lternate procedures may be omitted when both of the following conditions apply# • There are no unusual +ualitative factors or systematic characteristics related to the nonresponses, such as that all nonresponses p ertain to year-end transactions. • The nonresponses, projected as 100C misstatements to the population and added to the sum of all other unadjusted differences, would not affect the auditor"s decision about whether the financial statements are materially misstated

14-0. a.

The aged trial balance is used primarily in assessing the ade+uacy of the allowance for uncollectible accounts.


14-@

b.

3rocedures applied to the aged trial balance include %1& footing and crossfooting the aged trial balance and comparing the total to the general ledger balance for accounts receivable and %& testing the aging of the amounts shown in the aging categories by examining supporting documentation such as dated sales invoices.

c.

'fter testing the accuracy of the aged trial balance the auditor should perform the following procedures to draw a conclusion about the fair presentation of the allowance for doubtful accounts. • 7xamine past due accounts for evidence of collectability such as correspondence with customers and outside collection agencies, credit reports, and customers8 financial statements. • ;iscuss collectability of accounts with appropriate management personnel. • 7valuated management8s process for estimated the allowance for doubtful accounts using hindsight. • 7valuate the ade+uacy of the allowance given information about industry trends, aging trends, and collection history for specific customers.

d.

5indsight allows auditors to evaluate the reasonableness of management8s process for estimating the allowance for doubtful accounts. The reliability of management8s process for developing this accounting estimate can be gauged by evaluating estimates in prior periods and the degree to which those estimates accurately estimated subse+uent uncollectible accounts.

14-1. D''3 disclosure for accounts receivable include# • ;isclosure of receivables from employees, officers, affiliated companies and other related parties. • 'ppropriate classification of material credit balances. • 'ppropriate classification of current and noncurrent receivables. • ;isclosure of pledging, assigning, or factoring receivables.

$b%ecti&e 'uestions 14-. 14-(. 14-4. 14-.

1.c 1.c 1.a 1.d

.d .d .b .a

(.a (.a (.c (.a

4.d 4.d 4.d 4.d

.b .b .b

Comprehensi&e 'uestions 14-9. %7stimated Time# 1 inutes&


14-A

The auditor should consider separately audit the revenues associated with the : owned properties and the 40 managed properties. $evenues for the : owned properties represent direct revenues of the motel chain. The auditor might consider evaluating the summer season separate from the b alance of the year as the auditor will expect occupancy to be high during that time of year and the auditor will also expect that revenues should reflect higher rates. The auditor would also expect that for the balance of the year occupancy should be lower and revenues per night will be reduced due to significant price competition. Enowledge of the industry will be particularly helpful in gauging the reasonableness of occupancy rates and revenues per unit. $evenues for the 40 managed hotels will li*ely be related to management fees based on revenues earned for absentee owners. The auditor needs to consider the same issues as above, but also need to determine the appropriateness of the management fee based on the contract with absentee owners. 14-:. 3$<>=7 14-: 2'! )/=6;7; ) T57 T7FT ) 7$$<$. T57 =<2/5'$T < 3'D7 @4 ;<7! =7. )G;7G6'T7 )<$'T)< )! '?')='>=7 <$ !T6;7T! T< !<=?7 T57 3$<>=7. T57 '6T5<$8! '; <5 2)=7H 7FT7; T57)$ '33<=
)o

14-A. %7stimate Time# (0 inutes& *eakness inancial secretary exercises too much control over collections.

Recommended Impro&ement To extent possible, financial secretary"s responsibilities should be confined to record *eeping.


14-10

*eakness

Recommended Impro&ement

inance committee is not exercising its assigned responsibility for collections.

inance committee should assume a more active supervisory role.

The auditing function has been assigned to the finance committee, which also has responsibility for the administration of the cash function. oreover, the finance committee has not performed the auditing function. The head usher has sole access to cash during the period of the count.
'n audit committee should be appointed to perform periodic auditing procedures or engage outside auditors to perform the procedures.

The number of counters should be increased to at least two, and cash should remain under joint surveillance until counted and recorded so that any discrepancy will be brought to attention. The collection should be deposited in the ban*"s night depository immediately after the count. 3hysical safeguards, such as loc*ing and bolting the door during the period of the count, should be instituted. ?ulnerability to robbery will also be reduced by increasing the number of counters. The head usher"s count lac*s usefulness The financial secretary should receive a copy from a control standpoint because he of the collection report for posting to the surrenders custody of both the cash and the financial records. The head usher should record of the count. maintain a copy of the report for use by the audit committee. /ontributions are not deposited intact. /ontributions should be deposited intact. )f it There is no assurance that amounts is considered necessary for the financial withheld by the financial secretary for secretary to ma*e cash expenditures, she expenditures will be properly accounted for. should be provided with a cash wor*ing fund. The fund should be replenished by chec* based upon a properly approved reimbursement re+uest and satisfactory support. embers are as*ed to draw chec*s to embers should be as*ed to ma*e chec*s JcashJ, thus ma*ing the chec*s completely payable to the church. 't the time of the negotiable and vulnerable to count, ushers should stamp the church"s misappropriation. restrictive endorsement %or ;eposit ecause much of the wor* in cash


14-11

*eakness collections apparently have not been prepared.

Recommended Impro&ement collections is performed by unpaid, untrained church members, often on a shortterm basis, detailed written instructions should be prepared.

14-(0. %7stimated Time# (0 minutes& a.

Consolidated +lectricity Company, Cash Receipts Flo-chart

;ocumentary 'udit Trail

Eey $eports

/omputer 3rograms and iles

/ustomer 3ayment 'ccounts $eceivable ile

$emittance 'dvice

/'!5 $7/7)3T! 3$
;ata 7ntry at /$T

/ash $eceipts Transaction ile

;eposit !lip

b.

Hes, the new cash receipts procedures have created some systems and internal control problems. These problems include the following# • There are some potential control problems in the data entry procedures. The /$T operator should be restricted to cash receipts processing activities. There should be safeguards to detect or prevent unauthorized entries to the system. • The old master file records are destroyed in the update process. The company should *eep a bac*up of the accounts receivable file in case the file is destroyed. This can be accomplished by periodically dumping the accounts receivable file on magnetic tape or another dis* • There is no assurance that all cash receipts have been entered correctly into the system. There should be some independent computation of batch andKor hash


14-1

•

totals involving the remittance advices and the number of transactions so that a comparison at the conclusion of processing would reveal omissions or errors The remittance advices The remittance advices are destroyed the next day, which probably is too soon. 'ny errors or operator alterations not discovered by the end of the next business day would be difficult to trace and correct.

14-(1. %7stimated Time L  inutes& a. Substanti&e !est

?ouch aged trial balance to supporting documentation 'pply analytical procedures

?ouch recorded receivables to supporting documentation 3erform sales cutoff test /onfirm accounts receivable ?ouch aged trial balance to supporting documentation ?ouch recorded receivables to supporting documentation ?erify accuracy of accounts receivable trial balance and agreement with general ledger control 7xamine subse+uent collections or allocation /onfirm accounts receivable /ompare statement presentation with D''3 3erform cash receipts cutoff test

b. Financial Statement Assertion ?aluation or allocation

c. !ype of +&idence

;ocumentary

7xistence or occurrence, completeness, valuation or allocation 7xistence or occurrence, rights and obligations, valuation or allocation 7xistence or occurrence, completeness 'll except presentation and disclosure. ?aluation or allocation

'nalytical

7xistence or occurrence, rights and obligations, valuation or allocation ?aluation or allocation

;ocumentary

7xistence or occurrence, completeness, valuation 'll except presentation and disclosure 3resentation and disclosure 7xistence or occurrence, completeness

;ocumentary

;ocumentary

;ocumentary /onfirmation ;ocumentary

athematical

/onfirmation ;ocumentary ;ocumentary


14-1(

14-(. %7stimated Time L 0 minutes& !chedule of 'djustments

Cost of Sales oods Sold !ransaction /nder $&er /nder $&er ' ,000 ; 4,000 ,900 7 10,000  9,000 5 @,000 ,00 Total 14,000 14,000 :,00 ,900 'djusting 7ntry 1,A00 /ost of Doods !old 1,A00 )nventory 14-((. %7stimated time - 1 minutes& a. Eing might justify omitting the confirmation of /ycle"s accounts receivable when# • The balance is immaterial to the financial statements. • The use of confirmations would be ineffective as an audit procedure. • The auditor"s combined assessment of inherent ris* and control ris* is low, and that assessment, made in conjunction with the evidence expected to be provided by analytical procedures or other substantive tests of details, is sufficient to reduce audit ris* to an acceptably low level for the applicable financial statement assertions. b.

)n designing confirmation re+uests, the auditor considers the acceptable level of detection ris* needed to be achieved, the composition of the client"s customer balances, and the li*elihood that the customers will conscientiously respond. The positive form is used when detection ris* is low or individual customer balances are relatively large. The negative form should be used only when all three of the following conditions apply# • The acceptable level of detection ris* for the related assertions is moderate or high. • ' large number of small balances is involved. • The auditor has no reason to believe that the recipients of the re+uests are unli*ely to give them consideration.

c.

2hen no response is received after the second or third positive confirmation re+uest to a customer, the auditor should apply such alternative procedures as %1& examining subse+uent collections and %& vouching open invoices comprising the customer"s balance. 'lternate procedures may be omitted when both of the following conditions apply#


14-14

• •

There are no unusual +ualitative factors or systematic characteristics related to the nonresponses, such as that all nonresponses p ertain to year-end transactions. The nonresponses, projected as 100C misstatements to the population and added to the sum of all other unadjusted differences, would not affect the auditor"s decision about whether the financial statements are materially misstated.

14.(4. %7stimated Time L  inutes& a.

There are two forms of accounts receivable confirmation re+uestsB the positive form and the negative form. ' positive form as*s the debtor to respond whether or not the debtor is in agreement with the information on the confirmation re+uest. ' negative form as*s the debtor to respond only if the debtor disagrees with the information on the confirmation re+uest. The negative form generally re+uires follow-up by the auditor in the form of practicable alternative procedures that are used to obtain necessary evidence. The use of the positive form is preferable when individual account balances are relatively large, when there is reason to believe that there may be a substantial number of accounts in dispute or with inaccuracies or irregularities. The negative form is useful when internal control surrounding accounts receivable is considered to be effective, a large number of small balances is involved, and the auditor has no reason to believe that persons receiving the re+uests are unli*ely to give them consideration.

b.

' debtor"s ac*nowledgement of indebtedness does not indicate whether the indebtedness is collectible. ' good indicator of collectability is an aging schedule. Denerally, the older an account is, the less li*ely it will be collected. 'n aging schedule should segregate past due and current accounts. ;odge should review, analyze, and interpret the aging schedule to determine whether the client"s allowance for uncollectible accounts is ade+uate. aterial differences, if any, should be adjusted by the client. )n connection with the aging review and interpretation, ;odge should investigate all accounts receivable losses of preceding periods and the amounts of uncollectible accounts charged off in the current period to determine if the bad debt rate is increasing and if charge-offs because of uncollectability are properly approved. 'fter a review of correspondence, minutes, and collection procedures, and after discussions with the appropriate client credit and collection officials, ;odge should prepare an estimate of the possible collection losses and compare the estimate to the amount of the recorded allowance. 2here necessary ;odge should review client credit files as well as reports of external credit agencies. ;odge should also examine subse+uent cash receipts to ascertain what portion of amounts owing at the balance sheet date have actually been collected in the subse+uent period.


14-1

14-(. %7stimated Time L (0 inutes& 1o- eneral2Purpose Computer 0asic Recei&able Audit !est Soft-are Package and !ape of Accounts Recei&able Data ight be /seful Test the mathematical athematically compute the total amount owed by each accuracy of the accounts customer. The total is the sum of all unpaid items less receivable subsidiary ledger. cash receipts during the current month. !elect individual customer The selection of individual accounts for confirmation accounts for confirmation. may be made either by ma*ing a simple random sample or a stratified sample. )ndividual customers with balances in excess of a specified dollar amount may be selected. ' random sample of other accounts may be selected. 'ccounts with past-due, outstanding balances may be selected, as well as accounts with any other characteristics of interest to the auditor. 7xamine cash receipts and =isting a sample of items on the accounts receivable file sales cutoff. for which the date of last sale and the date of last cash receipt are immediately prior to the confirmation date. 'nalyze accounts receivable =isting of customers and open items on the accounts for slow paying customers receivable file for which the date of last payment or ratio and past due accounts. of month"s payments to balance owed indicates a slow paying customer or past-due amounts. 'ge the accounts receivable. The open, or unpaid, invoices in the accounts receivable file may be aged by current, (0 days, 90 days, and other time periods for which the items are past due. 3rint confirmation re+uest. >y utilizing especially prepared, preprinted forms, the confirmation re+uest may be printed, together with the envelope in which it is to be mailed. !econd re+uest and control copies may be printed simultaneously. )dentify credit balances. 'ccounts having credit balances in accounts receivable may be listed. !elect individual sales or selected accounts, the auditor may have listing transactions and cash receipt prepared of individual items composing the accounts transactions for additional receivable balance. This information is useful, for audit procedures. instance, in following up on Jno-repliesJ to confirmation re+uests.


14-19

Cases 14-(9. %7stimated Time L (0 inutes&

Accounts Receivable Gross Allowance or Unco llectabl e Accounts $et Receivables &otal Ass ets &otal Revenues Uncollectable Accounts '()ense *riteo o Accounts Receivable

Year 5 Unaudited 535,00 0 !"14,500# 520,500 2,200,000 2,700,000 33,750 22,600

Yar 4 Unaudited 295,000 !"6,400 # 2%%,600 1,%00,000 2,050,000 25,625 24,500

Year 3 Unaudited 265,000 !"5,275 # 259,725 1,500,000 1,750,000 21,%75 22,500

Year 2 Unaudited 207,500 !"5,900 # 201,600 1,200,000 1,400,000 17,500 17,000

Year 1 Unaudited 175,000 !"5,400 # 169,600 1,000,000 1,200,000 15,000 14,000

a. Selec ted Ratios

+ales to averae total assets .ndustr/ edian ierence

1-35 1-25 0-10

1-24 1-23 0-01

1-30 1-29 0-01

1-27 1-26 0-01

AR Growt to +ales Growt

2-53

0-65

1-15

1-13

4% 47 1

4% 47 1

AR collection )eri od .ndustr/ edian ierence Uncollectable account e()ense to net credit sales .ndustr/ edian ierence Uncollectable account e()ense to bad debt writeos

b.

55 47 %

49 4% 1

1-25 1-50 0-25

1-25 1-30 0-05

1-25 1-25 0-00

1-25 1-25 0-00

1-493

1-046

0-972

1-029

The unaudited figures for 'urora anufacturing, )nc. show the following# • There was a significant increase in sales compared to total assets, particularly when compared to industry averages. This is an indication of possible existence and occurrence problems as past history of the ratio of total assets to sales would predict lower sales levels. The auditor should expand the scope of accounts receivable confirmations. • The collection period is increasing relative to industry averages and past history. urther, accounts receivable are growing faster than sales. The 'urora continues to use a historical rate of 1.C of credit sales to provide for uncollectable accounts while industry trends show an increase in the rate of bad debts to credit sales. The is an indication of possible problems of associated with the net realizable value of receivables. The auditor needs to expand the scope of tests of collection of current receivables, the allowance for uncollectable accounts, and the provision for bad debt expense.

14-(:. !ee separate file with answers to the comprehensive case related to the audit of t. 5ood urniture that is included with this chapter.


14-1:

14-(@. !ee separate file with answers to the comprehensive case related to the audit of t. 5ood urniture that is included with this chapter. 14-(A. !ee separate file with answers to the comprehensive case related to the audit of t. 5ood urniture that is included with this chapter.

Research 'uestions or the reasons specified in the introduction to this manual, solutions are not provided for this category of +uestions.


14-1@

Solution Manual Auditing Chapter 14 Boynton 8th Ed.

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