A3 CH 116, 12 , 2 26.pdf - Chapter 16 Completing the Tests in the sales and collection cycle(Accounts receivable Methodology for designing tests of

A3 CH 116, 12 , 2 26.pdf - Chapter 16 Completing the Tests...

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1 Chapter 16 Completing the Tests in the sales and collection cycle: (( ( (Accounts receivable) ) )) Methodology for designing tests of details of balances (Account receivable) 1. Identify client business risk affecting account receivable Tests of accounts receivable are based on the audit or’s risk assessment procedures that provide an understanding of the client’s business and industry. The auditor studies the client’s industry and external environment and evaluates management objectives and business processes to identify significant client business risks that could affect the financial statements, including accounts receivable. For example , as a result of adverse changes in the industry’s economic environment, the auditor may increase inherent risk for net realizable value of accounts receivable . 2. Set tolerable misstatement and assess inherent risk for account receivable The auditor first decides the preliminary judgment about materiality for the entire financial statements. Then, allocates the preliminary judgment amount to each significant balance sheet account, including accounts receivable. This allocation is called setting tolerable misstatement . Accounts receivable is typically one of the most material accounts in the financial statements for companies that sell on credit. 4. Design and perform Test of control & substantive tests of transactions Designing audit procedures for tests of controls and substantive tests of transactions , , and . The results of the tests of controls determine whether assessed control risk for sales and cash receipts needs to be revised. Auditors use the results of the substantive tests of transactions to determine the extent to which planned detection risk is satisfied for each accounts receivable balance-related audit objective. 3. Assess control risk for the sales and collection cycle Auditors are especially concerned with three aspects of internal controls 1. Controls that prevent or detect embezzlements .ةقرسلا 2. Controls over cutoff. 3. Controls related to the allowance for uncollectible accounts. 5. Design and perform analytical procedures Analytical procedures are often done during three phases of the audit : During planning, when performing detailed tests, and as a part of completing the audit. Most analytical procedures performed during the detailed testing phase are done after the balance sheet date but before tests of details of balances. It makes little sense to perform extensive analytical procedures before the client has recorded all transactions for the year and finalized the financial statements. Auditors perform analytical procedures for the entire sales and collection cycle , not just accounts receivable.
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