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Unformatted text preview: Chapter 16 Completing the Tests in the Sales and Collection Cycle: Accounts Receivable Chapter 16 is a key chapter because it builds on Chapters 14 and 15. It is also the first chapter where tests of details of balances are applied. The following are the topics we cover: Chapter opening vignette Methodology for designing tests of details of balances Designing tests of details of balances Confirmation of accounts receivable Developing tests of details audit program Review Chapter Opening Vignette When More Isnt Better This vignette makes one essential point: the quality of evidence is more important than the quantity of evidence. In fact, low quality cannot be compensated for by high quantity. Confirmations are used to illustrate this point and can be discussed here. Other types of evidence can also be discussed: e.g., internal vs. external documentation and the value of client representations. Methodology for Designing Tests of Details of Balances (page 526) Before covering the methodology for designing tests of details of balances, we spend quite a bit of time reviewing key concepts. Examine the summary of the audit process in Figure 13-9 (page 426) to review how tests of controls and substantive tests of transactions (Chapter 14) and audit sampling for tests of controls and substantive tests of transactions (Chapter 15) tie into Chapter 16. It is also useful to do the same with Figure 13-7 (page 420). (See Figures 13-9 and 13-7) Review Figure 13-2 (page 406) to describe the role of analytical procedures and tests of details of balances in the audit of the sales and collection cycle. (See Figure 13-2) We cover the methodology for designing tests of details of balances by using Figure 16-1 (Page 527) as a frame of reference. We discuss the following steps: (See Figure 16-1) 16-1 Identify client business risks Set tolerable misstatement and assess inherent risk Assess control risk We use Figure 16-2 (page 529) to describe the relationship between transaction-related and balance related audit objectives for the sales and collection cycle (See Figure 16-2) Design and perform tests of controls and substantive test of transactions Design and perform analytical procedures Table 16-1 (page 530) can be used to illustrate analytical procedures for the sales and collection cycle. We also use Tables 16-2 and 16-3 (page 531) to highlight practical applications of analytical procedures for the sales and collection cycle using data for Hillsburg Hardware....
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- Spring '10