7.58 Control Assertion Associations Error Assertions a) Sales recorded, goods not Occurrence shipped b) Goods shipped, sales not Completeness recorded c) Goods shipped to a bad Accuracy credit risk customer d) Sales billed at the wrong Accuracy price or wrong quantity e) Product A sales recorded as Classification Product line B f) Failure to post charges to Completeness customers for sales g) January sales recorded in Cutoff December 7.59 Client Control Procedures and Audit Tests of Controls For each client control activity numbered 1-15, write an auditor’s test of control procedure that could produce evidence on the question of whether the client’s control has been installed and is in operation. Sales Invoice Sample: Select a sample of random numbers representing recorded sales invoices, and 1(a). Inspect the attached sales order for credit approval signature. 1(b). Trace customer to up-to-date credit file/information underlying the credit approval. 2. Inspect the attached shipping document for (i) existence, and (ii) prenumbering imprint. 3. Compare billed quantity on sales invoice to shipped quantity on shipping document. 4. Find the sales invoice associated with the random number (failure to find this means an invoice wasn’t recorded). Alternatively, use computer to add up the recorded sales invoice numbers and compare to a sum of digits check total. 5. Compare sales invoice to sales order for quantity, price, and other terms. 6. Compare prices on sales invoice to approved price list. 7. Check product line code for proper classification compared to products invoices. 11. Compare invoice date to shipping document date. 14. Note whether credit files are updated for customer payment history. Other 2. Count the number of shipping documents (subtract beginning number from ending number) and compare to same-period count of sales invoices (to look for different number of documents). 2. Select a sample of random numbers representing shipping documents and look for them in the shipping document file. 2. Computer-scan the shipping document file for missing numbers in sequence. 2. Use computer to add the shipping document numbers entered in the files and compare to a computed sum of digits check total. 8. Find client’s sales dollar batch totals, recalculate the total, and compare to sales journal of the relevant period. 9. Use the same sales dollar batch totals for comparison to separate total of accounts receivable subsidiary postings, if available. 10. Study the accounting manual and make inquiry about accountants’ instructions to date sales on date of shipment. 12. Obtain client’s documentation showing A/R subsidiary total reconciled to A/R control account. Alternatively, add up the subsidiary and compare to the control account. 13. Obtain client’s documentation showing reconciliation of intercompany receivables and payables for sales and purchases. Alternatively, confirm balances with subsidiaries or other auditors. 14. Select a sample of credit files and trace to customers’ accounts receivable, noting extent of up-date for payment history. 15. Study client correspondence on investigation and collection efforts on overdue customer accounts, noting any dispute conditions. If no effort is made, follow up overdue accounts with audit procedures (confirmation, determine existence of debtor in directories, etc.) 7.60 Confirmation of Trade Accounts Receivable a. Auditing standards presume that auditors will request confirmation of the client’s accounts receivable. An auditor can justify omitting these confirmations if: 1. The accounts receivable are immaterial to the financial statements. 2. The expected response rates to properly designed confirmation requests will be inadequate, or responses are expected to be unreliable, hence the confirmation procedures would be ineffective. 3. The evidence expected to be provided by analytical procedures or other substantive procedures is sufficient to reduce audit risk to an acceptably low level for the applicable financial statement assertions. b. These factors will affect the reliability of confirmations: 1. The confirmation form. Some positive forms request agreement or disagreement with information stated on the form. Other positive forms, known as blank forms, request the respondent to fill in the balance or furnish other information. Negative forms request a response only if the recipient disagrees with the information stated on the request. 2. The auditor’s prior experience with this client or similar clients is also likely to affect reliability because the auditor will have prior knowledge of the expected confirmation response rates, inaccurate information on prior years’ confirmations, and misstatements identified during prior audits. 3. The nature of the information being confirmed may affect the competence of the evidence obtained as well as the response rate. For example, this client’s customers’ accounting systems may permit confirmation of individual transactions, but not account balances, or vice versa. 4. Sending the confirmation requests to the proper respondents will likely provide meaningful and competent evidence. Each request should be sent to a person the auditor believes is knowledgeable about the information to be confirmed. c. The nature of the alternative procedures the auditor can apply when replies to positive confirmation requests are not received varies according to the account and assertion in question. Possible alternative procedures include: 1. Examining subsequent cash receipts and matching such receipts with the actual items being paid. 2. The auditor can also consider inspecting the client’s customers’ purchase orders on file and related shipping documents. 3. Inspecting correspondence between the client and its customers could provide additional evidence. 4. The auditor may also establish the existence of the client’s customers by reference to credit sources such as Dun & Bradstreet or other sources of identification (e.g., telephone book, business directories, state incorporation files). 7.61 Audit Objectives and Procedures for Accounts Receivable a. Accounts receivable represent all amounts owed to the client company at the balance sheet date. 2. Perform sales cut-off tests to obtain assurance that sales transactions and corresponding entries for inventories and cost of goods sold are recorded in the same and proper period. b. The client company has legal right to all accounts receivable at the balance sheet date. 5. (best) Review loan agreements for indications of whether accounts receivable have been factored or pledged. 4. (possible) Obtain an understanding of the business purpose of transactions that resulted in accounts receivable balances. c. Accounts receivable are stated at net realizable value. 3. Review the aged trial balance for significant past due accounts. d. Accounts receivable are properly described and presented in the financial statements. 6. (best) Review the accounts receivable trial balance for amounts due from officers and employees. 4. (possible) Obtain an understanding of the business purpose of transactions that resulted in accounts receivable balances.