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Monday, November 2, 2015

Audit of Receivables: Internal Control Measures and Substantive Audit Procedures

Internal Control Measures

1. Proper internal control over receivables should observe the following:
    a. Sales must be separated from the accounting for them.
    b. Accounting for sales must be separated from the receipt of cash arising from the receivables.
    c. Returns, allowances, discounts, and uncollectible charge-offs must be properly approved and separated from the cash receipts function.
    d. Periodically, receivables should be aged in order to determine the actions and efficiency of the credit department.

2. Notes receivable custodian should not have access to cash or to the accounting record.

3. A responsible official who does not have access to the notes should approve note renewals as well as charge- offs of defaulted notes in writing.

4. Proper procedures should be adopted for the follow-up of defaulted notes.

Substantive Audit Procedures

Sales and Accounts Receivable Balances

Existence or occurrence: Sales and accounts receivable are for shipments made to customers
1. Confirm accounts receivable and perform procedures for confirmations not returned.
2. Perform analytical procedures to test sales and accounts receivable.

Completeness: Sales transactions that occurred and existing receivables are recorded
3. Perform a test of sales cutoff.

Rights and obligations: Accounts receivable are owned by the client
4. Review minutes of the board of directors' meetings, inquire of the client personnel, read contracts and agreements, and confirm with lenders any indications that accounts have been assigned, sold, or pledged.

Valuation and allocation: Accounts receivable are properly valued
5. Verify mathematical accuracy of the accounts receivable aging schedule and trace it to the accounts receivable subsidiary ledger.
6. Test the adequacy of the allowance for uncollectible accounts.

Presentation and disclosure: Sales and accounts receivable are properly presented and disclosed in accordance with GAAP.
7. Review financial statements and perform analytical procedures to determine whether accounts are classified and disclosed in accordance with GAAP.

Sales Transactions

Completeness: Sales transactions that occurred are recorded
1. For a sample of shipping documents, trace sales invoice and entry into sales journal and accounts receivable subsidiary ledger. Perform cutoff tests.

Occurrence: Recorded sales are for shipments actually made to customers
2. For a sample of entries in the sales journal, compare sales invoice copy, customer order, and sales invoice.

Classification: Sales and accounts receivable transactions have been recorded in the proper accounts
3. For a sample of entries in the sales journal, verify the accuracy of account coding.

Accuracy (Valuation): Sales are correctly billed and recorded

4. For a sample of entries in the sales journal, (a) examine sales invoice, shipping document, and customer for consistency of descriptions and quantities; (b) examine sales orders for credit approval; and (c) check prices and extensions. Foot sales journal and general ledger account.

Copyright @PhilCPAReview

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