Accounts Receivable Audit: Analysis, Study, and Recommendations

This article provides an in-depth analysis of accounts receivable audit, including receivable audit, sample size of population, performance of audit procedures, analysis of exceptions in confirmation of accounts receivable, journal entries for correction, and results of accounts receivable. It also offers recommendations for auditing accounts receivable.

Assignment 2
Name of the Student
Name of the Course
Name of the University
1 TABLE OF CONTENTS
2 Introduction.........................................................................................................................2
3 Analysis and Study.............................................................................................................2
3.1 Receivable Audit.........................................................................................................2
3.2 Sample Size of Population...........................................................................................3
3.3 Performance of Audit Procedures...............................................................................4
3.4 ANALYSIS OF EXCEPTIONS IN CONFIRMATION OF ACCOUNTS
RECEIVABLE.......................................................................................................................5
3.5 Journal Entries for the Correction in the given format................................................6
3.6 Results of Accounts Receivable – Fairness of the Act................................................7
4 Summary, Conclusion and Recommendations...................................................................9
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2 INTRODUCTION
Accounts receivable is considered to be one of the immensely pertinent areas in a company’s
accounts. These are asserted importance of such level owing to the rationale that these are the
revenue that is to be received by the company at the expected time and amounts that was
agreed between the parties at the time of the sales transactions. When there arises a delay in
these payments then this would ultimately reflect upon the short term as well as the long term
cash flow of the economic entity respectively.
3 ANALYSIS AND STUDY
3.1 RECEIVABLE AUDIT
The starting point of the receivables audit would be the tracing of the receivable report
to the register. The period-end accounts receivable aging report would be used to check
the total with the grand total of the outstanding that has been depicted in the ledger.
These totals however need not match under all conditions as there might be a balancing
entry at some part that might be aiding the accounts to be balanced in an accurate fashion
respectively. The invoices those are present as the supporting documents with respect to
the receivables / sales outstanding would be added up to substantiate the accounts
receivable aging report , so as to ensure that the amount represented in the general ledger
is well supported with grass root level documents. After the regular documentation has
been perused and a reliable opinion pertaining to the control systems those operate
within the company has been established in a concrete manner, the reconciliations are
carried out. The journal entries those are pertaining to the accounts receivable account
which is a part of that general ledger, will be verified for quantity and substance. Any
entry that do not corroborate with the evidence that backs the same would be perused
further for legitimacy respectively.
Then the sampling and survey as well as the external confirmation related procedures are
commenced. These would start with a sample population being selected from the
invoices those are a part of the receivable report. The sampling process starts when the
auditors select some invoices pertaining to accounts receivable aging report for
comparison in terms of the existence of the byer, the amount of sale, date of the
respective sale and the like. Thereafter these invoices would also be verified for the
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stock movements wherein the team would match invoice dates to the goods outward
which is given as part of the shipping log, ensuring apt accounting period being followed
along with apt releases with respect to quantity and date. Prior period invoices are
located at this date. A sample of buyers is drawn as the next logical progression of this
particular process. In this particular stage the samples are drawn from the closing
balance of the receivables from the general ledger and a confirmation report is sent out
to the sample debtors / buyers. These are then verified for accuracy and other details
contained in them.
The company that would be audited as a part of this case study would be Brant Animal
Hospital Professional Corporation’s and the accounts receivable part would be intersected
receptively. The processes would be followed based on the related Canadian standards and
the procedural guidelines offered by the case study.
3.2 SAMPLE SIZE OF POPULATION
A) Sample size of a population needs to be complaint with certain basic requirements to be
considered sufficient to represent the underlying population. In the resent case the population
the samples selected by Rose for the existence and cut off of the accounts needs to be such
that it could offer considerable assurance related to the accuracy of the accounting procedures
and approval processes those are in place as well as operational in the present economic
entity.
A) CAS 530 deals with sampling in case of the companies those have been established within
the geographical territory of Canada. Accordingly the following steps would be used to take a
sample size.
Particular USD
Total of Receivables
787707.
5
Total Overdue above 60 Days
84867.3
2
Percentage of Population
Represented 0.10774
Value of 30 - 60 Days 210313.
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5
Percentage of Population
Represented
0.26699
4
Since there is no explicit mention in the case as to the number of credit days of the company,
all balances standing above 60 days have been considered for account based audit owing to
the criticality and the nature of these moving soon into the bad / doubtful debts category
respectively. This the first estimation of the sample population with rationale.
The tolerable deviation rate is as follows
Particular USD
Estimated Error 31500
Tainting for Error 100%
Tolerable Misstatement 70000
Book Value of Population
787707.
5
Tolerable Deviation Rate
8.88654
7
B)
3.3 PERFORMANCE OF AUDIT PROCEDURES
The Audit procedures that would be followed in this case would be as follows. The samples
chose for study would be analysed with respect to the transactions those form part of the
accounts receivable in those particular accounts respectively. There after these would be
analysed for the actual occurrence of the transactions along with the values those have been
recorded for those transactions. These are then cross verified along with the
There are a number of occasions when the company decides to write off certain
receivable to be uncollectable and hence absorbs it as a loss / expense in the profit and
loss account. This is an immensely tricky area as a number of writer off have been later
been unearthed to be collectible debt or related party movement of funds. Hence an audit
of these balances would be based on a comparison with the method used in the previous
year. Another particular area that might demand a lot of attention would be that of credit
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notes issued to debtors which would go to reduce the amount of accounts receivables
outstanding. These credit notes needs to be analysed for their content, substance and also
credibility of issue. A trend line study and also a study based on the budgets is imminent
in case of accounts receivables as any spike in the regular pattern would deserve to be
attended in an unconventional manner by the auditing team respectively.
After the confirmations mailed to the customers have been returned without any discrepancy
in case of all but 3 of them noting the differences. These could either be mainly owing to the
errors in the ledgers pertain to the company or the errors / mis statements from the end of the
clients respectively. The following is an assumed case of returns of misstatements and a
display of various alternatives and decision tree by the auditor. Since these errors have been
agreed to be error by the management these would be journalised and reflected in the
accounts for rectification of these errors accordingly.
Confirmation from client number 20 Ascham came to 2318 $ while the books have recorded
2102.90 - undervaluation error, need to be verified and journalised.
Confirmation from Client number 37 Ballu Wayne amounted to 9526 $ whereas the amount
reflected in the books amounts to 9626 $ leading to an over statement of receivable which
needs to rectified with a journal entry.
In case of the postal non delivery further details pertaining to the reasons for the non-delivery
inclusive of the change of address not being recorded in the books, erroneous transactions,
any kind of intentional misrepresentation that might of resulted in this situation needs to be
verified before any action is being initiated in this respect.
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Client Name Brant Animal Hospital Professional Corporation
Year ended Dec. 31, 2012
3.4 ANALYSIS OF EXCEPTIONS IN CONFIRMATION OF ACCOUNTS
RECEIVABLE
Account receivable Account receivable Amount Reason(s) for difference Amount
Customer's balance per balance per of and determination of of error
Name client's records customer's confirmationdifferencecorrect receivable balance over
(under)
Ascham 2716 2500 216 Omission of Entry of article Under
Ballu Wayne 9426 9526 100 Client Payment in Suspense Over
3.5 JOURNAL ENTRIES FOR THE CORRECTION IN THE GIVEN FORMAT
ADJUSTING JOURNAL:
ACCOUNT
NUMBER ACCOUNT DEBIT CREDIT
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20 Ascham 216
XXXX Sales 216
TExplanation:o adjust records to reflect corrections made by client, see C-7; $216.75
and C-8; $100.
The sales
being omitted
has been
added to the
present sales
ADJUSTING JOURNAL:
ACCOUNT
NUMBER ACCOUNT DEBIT CREDIT
XXXX Suspense 100
37
Ballou
Wayn 100
Explanation:
Suspense
being
reduced
by the
value the
client
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has been
over
accounte
d
C)
3.6 RESULTS OF ACCOUNTS RECEIVABLE – FAIRNESS OF THE ACT
(For this calculation the name of the customer is taken on an assumed manner from the list in
the absence of specific names being mentioned in the assignment paper)
Customer
Name
Recorded
Accounts
Receivable
Correct
Accounts
Receivable Unit Error
Ascham 2500 2716 0.09
Balloue
Wayne 9526 9426 0.01
NO. OF Error
Upper
Precision
Limit
Increase in
Precision
Limit from
Each
Misstatement
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1 0.07 0.07
2 0.1 0.03
3 0.12 0.02
NO. OF Error
Upper
Precision
Limit
Increase in
Precision
Limit from
Each
Misstatement
Cumulative increase
in population
1 0.07 0.07 8.81
2 0.1 0.03 8.78
3 0.12 0.02 8.76
The above detailed calculation has reduced the tolerable error threshold and hence the sample
to be checked at this point would be increased by the reduction in the tolerable level of
misstatements.
Customer
Name
Recorded
Accounts
Receivabl
e
Correct
Accounts
Receivable Unit Error
Misstatemen
t Bound
Portion
Ascham 2500 2716 0.09 216.00
Balloue
Wayne 9526 9426 0.01 100.00
Customer
Name
Recorded
Value
Unit Error
Value
Unit Error
Assumption
Misstatemen
t Bound
Portion
Ascham 787707 0.09 70,893.6
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1.00 3
Balloue
Wayne 787707 0.01 0.67
5,285.5
1
This population overstatement and understatement has exceeded the bounds of the tolerable
misstatement of $ 70000 respectively. This population may not hence suffice to ensure the
authenticity of the accounts receivables stated by the company. This exceeds the estimated
error of 31500$ by a large proportion on another perception.
4 SUMMARY, CONCLUSION AND RECOMMENDATIONS
This exercise aided the understanding of the process of sampling followed by the auditors
while auditing the accounts receivable of a particular company. The calculations have been
carried out according to the directions along with necessary assumptions in the relevant
places receptively. The processes commences with the determination of sample size and the
tolerable error with respect to a particular case. In this case there were three errors those were
noticed in one of the main processes followed for audit of the accounts receivable namely
third party confirmation. The instances were noticed to be a flaw in the control system as
well as an instance of clerical error. Also a third instance of non-delivery has been noticed
which might indicate a bigger flaw or an instance of fraud. This resulted in the calculation of
the precision limit and these were increased based on the errors found in the process of third
part confirmation.
Along with this the factors like the bad and doubtful debts increase the level of samples to be
audited. For instance in this case the doubtful debts are those which are presumably within
the bucket of 60 days and above as outstanding receivables. These mandate them to be
analysed for the credibility of the transaction including the properiototy aspects of initiating
this particular transaction. Also the related party transactions have not been mentioned in this
particular case. This also has a large impact on the decision to be made by an auditor in
determining the size of the sample inclusive of all such transactions respectively. Since in a
number of cases it has been observed that related party transactions do relate to money
transfers among the companies those are held by the same corporation these also need to be
accounted for in the apt manner.
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Another pertinent area of consideration in this case would be the acceptance of the
management to restate the errors without an explanation. This highlights that the
management is not assured about the transaction recording as well as management process in
place and the transactions have not been processed as well as approved in a controlled
manner respectively.
After conduct of empirical study of the samples along with the related analysis the following
has been summarised. This population overstatement and understatement has exceeded the
bounds of the tolerable misstatement of $ 70000 respectively. This population may not hence
suffice to ensure the authenticity of the accounts receivables stated by the company. This
exceeds the estimated error of 31500$ by a large proportion on another perception.
Hence on consideration of the numerical study inclusive of the other surrounding factors such
as the bad and doubt full debts, the management statements, the debtor ageing and the other
regular trends it could be concluded that the accounts receivable cannot be considered to be
fairly stated and needs to be further analysed for the control as well as the operational
procedures used by the company.
These may include but not be limited to testing of controls by a run though of the process of
sales, recording of transactions as well as the management of the accounts receivables. Prior
period items being analysed for their authenticity inclusive of the study of previous audit
reports in this aspect. Increasing the number of third party confirmations to match the error
rate that is tolerable to this particular audit. Management as well as staff interviews to
identify process related gaps that might be causing such paucity in assurances. Related parry
transitions, their pricing, the authenticity inclusive of any scope of fraudulent transactions.
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References
The main reference would be the case study and the accompanying documents. The other
references are appended below
Aniela, Lindsay M., Tamara A. Lambert, and Edward J. Lynch. "Sprandel, Inc.: Electronic
Workpapers, Audit Documentation, and Closing Review Notes in the Audit of Accounts
Receivable." Issues in Accounting Education 33.2 (2018): 43-55.
Bell, Emma, Alan Bryman, and Bill Harley. Business research methods. Oxford university press,
2018.
Hammersley, Jacqueline S., and Michael Ricci. "Using Audit Programs to Improve Auditor Evidence
Collection." (2018).
Knechel, W. Robert, and Steven E. Salterio. Auditing: Assurance and risk. Routledge, 2016.
Smith, Malcolm. Research methods in accounting. Sage, 2017.
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Yang, Ling, Alisa G. Brink, and Benson Wier. "The impact of emotional intelligence on auditor
judgment." International Journal of Auditing 22.1 (2018): 83-97.
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