Ch16 - Chapter 16 Completing Tests in the Sales and...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 16 Completing Tests in the Sales and Collection Cycle: Accounts Receivable Key objectives: 1. Know the relation of the risk model and results of other tests with tests of details of balances for accounts receivable. 2. Design and perform analytical procedures for the sales and collection cycle. 3. Design and perform tests of details of balances for accounts receivable for each balance- related objective. 4. Understand the types of accounts receivable confirmations and how to evaluate them. 1. Determining extent of TODB We have finally made it to the final element of detection risk - tests of details of balances (TODB). TODB make up the bulk of audit procedures. TODB for accounts receivable is the second most time-consuming part of the audit for most commercial entities (inventory is the most time-consuming). Refer to Figure 16-7 on page 539 of the text. Note that the planned audit evidence for tests of details of balances is a function of all the risk model factors, materiality, and results of other tests for sales and cash receipts , and is assessed separately for each objective. Some audit firms simplify the process. Some base the extent of TODB on only the assessment of CR and IR, and may not assess IR by objective. The assessments for sales and cash receipts may also be combined. A. Risk model factors 1. Acceptable audit risk - same for all objectives. 2. Inherent risk - varies by objective, depending upon likelihood of errors. SAS #99 on fraud includes a presumption that improper revenue recognition is a fraud risk. 3. Control risk - varies by objective, and depends upon the results of tests of controls for both sales and cash receipts (since both affect accounts receivable). Also remember that poor STOT can affect your assessment of control risk. 128
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
B. Materiality - In chapter 9, we made a preliminary judgment of materiality and allocated it to segments. The tolerable misstatement for accounts receivable is a function of acceptable audit risk and inherent risk, as well as the planning base used, and has a significant effect on the extent of testing. Greater materiality ------> less evidence required . C. Results of other tests 1. Tests of controls - see A.3. on previous page. Part of CR. 2. Substantive tests of transactions for both sales and cash receipts. 3. Analytical procedures . Substantive tests of transactions and analytical procedures are part of detection risk. These tests indicate the likelihood of errors in accounts receivable. 2. Analytical Procedures for Accounts Receivable Review the analytical procedures in Table 16-1 on p. 524. Most of these are fairly simple procedures that indicate the likelihood of errors in accounts receivable or the allowance for doubtful accounts. Research demonstrates that the most diagnostic ratio is the
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/18/2011 for the course ACCT 422 taught by Professor Smith during the Spring '11 term at UMBC.

Page1 / 14

Ch16 - Chapter 16 Completing Tests in the Sales and...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online