Summary
Highlights
Accounts receivable are created from sales on credit. Revenue recognition is a significant fraud risk, requiring auditors to assume specific fraud risks. The increase in accounts receivable and sales makes auditors cautious. Proper valuation of receivables is crucial, including estimating the allowance for uncollectible accounts, which also carries a significant risk of misstatement due to potential over or underestimation. This session will focus on substantive testing for accounts receivable.
Substantive testing for receivables includes substantive tests of transactions, analytical procedures, and tests of detailed balances. Substantive tests of transactions involve checking internal controls, such as creditworthiness approval. Analytical procedures, though optional as a substantive test, are efficient. The primary focus of this session is on testing detailed balances to gather evidence for accounts receivable-related objectives.
Key assertions for accounts receivable include existence, completeness, valuation, allocation and accuracy, classification, rights, and presentation. Some textbooks combine existence and occurrence, as occurrence relates to the sales transaction that creates the receivable. Although terminology may vary, the underlying concepts remain the same.
The objective of the existence assertion is to confirm that the recorded accounts receivable balances are real. This is best achieved through confirmations sent to customers. Reviewing subsequent cash receipts also provides strong evidence of existence. Inspecting sales and shipping documents can also support the existence assertion.
The completeness assertion aims to ensure that all receivables are recorded. For receivables, completeness is generally less of a concern as companies typically want to record all amounts owed to them. Auditors can verify completeness by obtaining an aged trial balance and tracing its total to the general ledger. Account receivable confirmations are less effective for completeness and valuation, as they don't provide evidence for omitted receivables or collectibility.
A multiple-choice question illustrates a balance-related audit objective (classification) and a transaction-related audit objective (posting and summarization). Classification determines if balances are current or non-current, while posting and summarization ensure proper ledger updates. These two are generally considered separate assertions.