Auditing Accounts Receivable
READING MATERIAL
I. Audit Objectives for Accounts Receivable
A. Risk Assessment for Accounts Receivable
B. Special Issues Concerning Accounts Receivable
1. Scope Limitation
2. Preparing and Mailing Confirmations
3. Documenting Items Being Confirmed
4. Presumption of Confirmation
5. Positive vs. Negative Confirmations
6. Interim Confirmations
7. Sampling Unit
8. Unnecessary Sampling
9. Projecting Misstatements
10. Direct Write-Off Method
11. Imputed Interest
12. Noncurrent Notes and Accounts Receivable
13. Collateralized Receivables
14. Employee Travel Advances
15. Sales Cutoff as a Specific Significant Risk Requiring Special Audit Consideration
16. Fraud Considerations
17. Fair Value
II. Typical Financial Statement Disclosures
A. Accounts and Notes Receivable from Officers, Employees, and Affiliated Companies
B. Allowances for Uncollectible Receivables
1. Example 1
2. Example 2
3. Example 3
C. Significant Concentrations of Credit Risk
D. Factored Receivables
E. Other Receivables
III. Special Considerations for Specific Industries
A. Not-for-Profit Organizations
B. Local Governments
LEARNING QUESTIONS
HOMEWORK
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Auditing Accounts Receivable
READING MATERIAL
I. Audit Objectives for Accounts Receivable
Receivables relate to amounts due from others from sales of merchandise, services, or other assets, or
as a result of a loan. Receivables are generally placed into one of three categories: trade, nontrade, and
related party. Trade receivables include open accounts, notes, and installment contracts representing
claims for goods and services sold in the ordinary course of business. Nontrade receivables may include
tax refund claims, sale of plant or equipment, or dividends receivable. Related-party receivables could be
due from employees, stockholders, officers, management, or affiliates.
A. Risk Assessment for Accounts Receivable
Accounts receivable is an area that tends to be of significant risk, as it is subject to management
manipulation in several ways. If a company is perpetrating fraud by overstating revenues with fictitious
sales, the amounts would be included in accounts receivable at period-end. Therefore, existence of
accounts receivable tends to be a significant risk if management is likely to overstate earnings. In
addition, management can manipulate financial results by altering the valuation of recorded receivables.
The valuation of accounts receivable is a subjective area, where assumptions can be challenged based
on additional information obtained after the balance sheet date. Therefore, when the adequacy of the
allowance for doubtful accounts is a significant risk, sufficiently experienced audit professionals should be
intimately involved in the testing and audit conclusions. Often, the most significant risk with accounts
receivable is proper valuation in accordance with generally accepted accounting principles.
Depending on: (i) the materiality of accounts receivable balances at year-end; (ii) the volume of
transactions flowing through specific accounts receivable accounts; (iii) the strength of the company’s
overall internal control environment; and (iv) the auditor’s assessment of control risk relative to billings
and cash receipts, the auditor may tailor standard audit procedures to reduce the risk of failing to detect
material misstatement in the financial statements to an appropriately low level.
The audit of any financial statement area must appropriately address each of the six primary
management assertions:
•
Existence or occurrence -- e.g., accounts receivable are authentic obligations owed to the
company at the date of the balance sheet;
•
Completeness -- e.g., accounts receivable include all amounts owed to the company at
the date of the balance sheet;
•
Rights and obligations -- e.g., pledged, discounted, or assigned accounts receivable are
properly disclosed;
•
Cutoff – e.g., accounts receivable are recorded in the proper period;
•
Valuation or allocation -- e.g., allowance for doubtful accounts is adequate but not
excessive; and
•
Accuracy or classification -- e.g., accounts receivable are appropriately classified in the
balance sheet, and required disclosures are made.
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The completeness assertion is often the most difficult assertion to test for revenue-related accounts. In
some cases, tests of controls supporting the completeness assertion may be necessary, as substantive
procedures alone may not be adequate. However, for many small businesses, the risk of material
unrecorded revenue may be minimal -- especially in a circumstance where operations are relatively
predictable and stable. Effective tests of completeness may be limited to inquiry, observation, and
substantive analytical procedures.
AU Section 240, Consideration of Fraud in a Financial Statement Audit, requires the auditor to perform
preliminary analytical procedures relative to identifying the risk of material fraudulent financial reporting
related to revenues, which indirectly includes accounts receivable. Unusual or unexpected relationships
identified during preliminary analytical review procedures should be considered in designing the nature,
timing, and extent of testing of accounts receivable.
B. Special Issues Concerning Accounts Receivable
1. Scope Limitation
If management refuses to allow the auditor to perform external confirmation procedures, the auditor
should inquire about management’s reasons for the refusal and seek audit evidence about their validity
and reasonableness. The auditor should evaluate the implications of management’s refusal on the
auditor’s assessment of the relevant risks of material misstatement, including the risk of fraud, and on the
nature, timing, and extent of other audit procedures. The auditor should also perform alternative audit
procedures designed to obtain relevant and reliable audit evidence.
If management’s refusal is unreasonable, or if the auditor is unable to obtain relevant and reliable
alternative audit evidence, the auditor should communicate the situation to those charged with
governance. In addition, the auditor should determine the implications on the audit and auditor’s report.
2. Preparing and Mailing Confirmations
Have the client prepare the confirmation letters, when possible and efficient. Consider using word
processing mail merge functions to speed preparation. Include enough information (such as individual
invoice numbers, invoice dates, and specific amounts comprising the total being confirmed) for the
confirming party to specifically identify the items being confirmed. In addition, verify the proper address
for mailing (e.g., billing versus shipping address). The auditor should control the actual mailing of the
confirmations. This includes ensuring that the return address on the envelope is the audit firms, in case
requests are undeliverable. Timing of the audit should allow for second confirmations to be sent, as
necessary, for nonreplies and undeliverable requests.
3. Documenting Items Being Confirmed
There are various ways to document the items being tested, which can include: (i) listing the items in a
separate schedule; (ii) using a tick mark to identify the items being tested on the aged trial balance; or (iii)
documenting the source of selections and the criteria used to select the items for testing. If a scope
approach is used, the minimum dollar threshold should be identified. If a haphazard or random method is
used, unique identifying characteristics such as invoice or account numbers should be identified. If a
systematic approach is used, the starting point and sampling interval should be identified. Retain
photocopies of confirmation letters to facilitate sending of second requests.
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4. Presumption of Confirmation
AU Section 505, External Confirmations, defines external confirmations as audit evidence obtained as a
direct written response to the auditor from a third party (the confirming party), either in paper form or by
electronic or other medium (for example, through the auditor’s direct access to information held by a third
party). As a result, an oral response is considered alternative audit evidence.
AU Section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit
Evidence Obtained, requires auditors to document why confirmations are not sent for accounts
receivable. There is a presumption that confirmations will be sent, unless at least one of the following
criteria is met: (i) the accounts receivable balance is immaterial; (ii) using confirmations would be
ineffective; (iii) the risk of material misstatement (i.e., combined inherent risk and control risk) is low and
other substantive procedures will be adequate to meet the audit objectives; and (iv) the accounts
receivable are non-trade in nature (e.g., pledge receivables).
External confirmation procedures may be deemed ineffective based on prior years’ experience or
experience with similar entities. For example, response rates to properly designed confirmation requests
will be inadequate, or responses are known or expected to be unreliable. If the auditor has experienced
poor response rates to properly designed confirmations, the auditor may change the manner in which
confirmations are performed. The objective would be to increase the response rates, or the auditor may
consider obtaining audit evidence from other sources as an alternative.
5. Positive vs. Negative Confirmations
Positive confirmations ask the confirmee to make a positive statement whether they agree or disagree
with the information provided by the company’s records. These are the most common confirmations sent
in practice, and are the only acceptable form of confirmation for individually significant items. Negative
confirmations ask the confirmee to reply only if they disagree with the information provided. Negative
confirmations may only be used if all of the following criteria are met: (i) the combined risk of inherent and
control risk is low; (ii) a large number of small balances are involved; and (iii) the auditor believes the
recipients will consider the requests. Negative confirmations are not often used in common audit
practice, as the evidence gained is limited. If used at all, they are used as a supplement to positive
confirmations to obtain evidence about accounts not confirmed with positive confirmations -- particularly
in initial year audits.
6. Interim Confirmations
If confirming receivables at an interim date, the auditor will need to ensure that any subsidiary ledgers
used to select amounts to confirm are reconciled to the general ledger. At year-end, the auditor would
obtain a reconciliation of the balance sheet date accounts receivable subsidiary ledger to the general
ledger. The auditor would examine supporting documentation for significant reconciling items and
investigate any significant variations between the interim and year-end aging of accounts receivable and
in total. In addition, the auditor should scan the activity between the interim and year-end date for any
unusual activity.
7. Sampling Unit
Consider using individual invoice totals versus customer balances as the sampling unit when selecting
amounts for confirmation. This may increase the response rate and reduce exceptions, as the confirming
party would be less apt to have to reconcile point in time totals comprised of multiple invoices. In
addition, it is less work if alternate procedures are required because of nonreplies, as the auditor only has
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to verify the invoice selected for testing as opposed to all the invoices that my comprise a customer total.
However, if the completeness assertion is deemed to be a significant risk, then the auditor should
consider confirming customer balances instead.
8. Unnecessary Sampling
The auditor would normally confirm 100 percent of individually significant items, due to dollar value or
unusual characteristics (e.g., significantly past due, related party, or unusual name). If there are
significant credit balances, the credit balances should be reclassified to accounts payable prior to
calculating the sample size. If coverage of individually significant items results in adequate coverage of
the account balance, additional selection of items for confirmation through sampling may not be
warranted.
9. Projecting Misstatements
When misstatements are identified in confirmations tested through sampling, the misstatements are
projected only to the population subjected to sampling, not the individually significant items selected for
100 percent testing. In addition, the auditor should always evaluate whether detected misstatements
indicate a systematic problem that might warrant a focused additional test (e.g., all receivables generated
within one week of year-end).
10. Direct Write-Off Method
While the direct write-off method is not a generally accepted accounting principle, it may approximate
GAAP if allowance and write-offs are immaterial. The auditor should evaluate the risk that significant
uncollectible accounts remain in accounts receivable, which could require an adjustment for GAAP-basis
financial statements.
11. Imputed Interest
While extended credit terms for accounts receivable are rare, interest should be imputed for significant
balances that are due in excess of one year from the balance sheet date.
12. Noncurrent Notes and Accounts Receivable
For notes and accounts receivable with greater-than-one-year maturities, the auditor should evaluate
whether the interest and principal payments will be collected in accordance with contract terms. If not, an
allowance for credit loss should be computed by: (i) the present value of expected future cash flows
discounted at the effective interest rate; (ii) the observable market price; or (iii) the fair value of the
collateral on which the receivable is dependent.
13. Collateralized Receivables
If collateralized accounts receivable are significant, the auditor should examine the collateral for
existence, ownership (e.g., bill of sale, title, deed, or mortgage) and fair value (e.g., appraisal, expert
report, blue book, security quote).
14. Employee Travel Advances
Generally, small businesses do not generate a significant amount of employee advances, so specific
procedures may not be warranted. However, the amounts may need to be confirmed or agreed to source
documentation on a test basis if material.
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15. Sales Cutoff as a Specific Significant Risk Requiring Special Audit Consideration
Certain circumstances may require additional procedures to test sales cutoff beyond basic substantive
analytical procedures and confirmation of accounts receivable. Such a circumstance could occur when
accounts are confirmed as of an interim date as opposed to year-end -- which limits the persuasiveness
of audit evidence without additional audit procedures or precise substantive analytical procedures. If,
during the inventory observation, the auditor notes that large quantities of goods are awaiting shipment,
this may indicate a risk of sales booked but not shipped. In addition, the results of analytical procedures
of sales trends and sales returns or credit memos right around year-end may indicate a sales cutoff issue.
Additional procedures may include the following:
a.
Scan the sales journal and investigate any unusual entries for a few months before and
after year-end;
b.
Review sales returns and credit memos for a few months before and after year-end and
investigate any unusual entries; and
c.
Trace a sample of shipping documents for shipments before and after year-end to the
sales journal to determine whether they were recorded in the proper period. Determine
sample size based on volume and dollar value of daily sales, as well as relative risk and
materiality.
16. Fraud Considerations
If the auditor has identified a specific risk of fraud related to accounts receivable existence, the auditor
may find it necessary to contact customers directly by telephone when confirming accounts receivable,
and additional information (such as significant contract or payment terms, right of return or refund
provisions, or lack of side agreements) may be confirmed with the customer. In addition, the auditor may
select individual accounts written off during the audit period to determine that they were properly
approved. Finally, the auditor may deem it necessary to perform a proof of cash in more significant cases
of potential fraud. In all cases where fraud is deemed a significant risk, the evidence gathered should be
more persuasive and detailed.
Common fraud schemes include the following.
a.
False credits, discounts, and other write-offs;
b.
Shipping goods to unauthorized parties;
c.
Manipulation of shipping or billing records for false or accelerated sales;
d.
Recording sales where the buyer’s obligation to pay depends on an uncertain future
event;
e.
Recording sales where the seller is obligated for substantial continuing involvement;
f.
Recording sales where there is lack of economic substance;
g.
Manipulation of percentage of completion or service proportion; and
h.
Lapping, the act of misappropriating a customer’s payment on account and covering the
theft by applying other customer’s payment against the stolen account. A future payment
on a different customer account is then applied against the first misapplied payment.
This is a difficult fraud to maintain in perpetuity, as payments must be constantly
misapplied to incorrect accounts to cover the fraud.
17. Fair Value
Accounts and notes receivable may require fair value disclosure in the financial statements. Most small
companies are exempt from fair value disclosures if they meet the following criteria: (i) the company is a
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nonpublic entity; (ii) the company’s total assets are less than $100 million at the date of the financial
statements; and (iii) the company has no financial instrument that is accounted for as a derivative
instrument during the reporting period (except for a commitment related to the origination of mortgage
loans to be held for sale). In addition, if repayment terms are less than 90 days, the carrying amount of
accounts receivable would typically approximate market value, so no specific fair value disclosure would
be warranted. The carrying amount of notes receivable will typically approximate fair value, unless the
interest rate is significantly greater or less than current market rates. If market prices are available, the
auditor will typically agree the fair value to those prices. If market prices are not available, the auditor will
typically need to assess the reasonableness of management’s rationale, assumption and method for
estimating fair value. Comparing fair value with subsequent, recent, or similar transactions is often
helpful in assessing the reasonableness of management’s estimates. Adequate disclosure requires the
method and significant assumptions used in estimation, as well as sufficient information about
measurement uncertainties. In addition, if it is not practical to estimate the fair value of a financial
instrument, the financial statements should disclose: (i) information pertinent to estimating the fair value of
the financial instrument; and (ii) the reasons why it is not practical to estimate the fair value.
II. Typical Financial Statement Disclosures
The following are samples of typical financial statement disclosures for small business entities.
A. Accounts and Notes Receivable from Officers, Employees, and Affiliated
Companies
Note X: Related-party Transactions
Officer loans were $XX and $YY at December 200X and 200Y, respectively. The unsecured loans bear
interest at three percent and are due on demand.
B. Allowances for Uncollectible Receivables
1. Example 1
Note 1: Summary of Significant Accounting Policies -- Accounts Receivable
Accounts are charged to bad debt expense as they are deemed uncollectible based on a periodic review
of the accounts. At December 31, 200X and 200Y, no allowance for uncollectible accounts was
considered necessary. Bad debt expense for December 31, 200X and 200Y was $XX and $YY,
respectively.
2. Example 2
Note 1: Summary of Significant Accounting Policies -- Accounts Receivable
Management has elected to record bad debts using the direct write-off method. Generally accepted
accounting principles require that the allowance method be used to reflect bad debts. However, the effect
of the direct write-off method is not materially different from the results that would have been obtained
had the allowance method been followed.
3. Example 3
Note 1: Summary of Significant Accounting Policies -- Accounts Receivable
Accounts receivable are based on contracted prices. The company provides an allowance for doubtful
collections that is based upon a review of outstanding receivables, historical collection information, and
existing economic conditions. Normal contracts receivable are due 30 days after the issuance of the
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invoice. Contract retentions are due 30 days after completion of the project and acceptance by the
customer. Receivables past due more than 120 days are considered delinquent. Delinquent receivables
are written off based on individual credit evaluation and specific circumstances of the customer.
No provision for doubtful accounts has been made at December 31, 200X and 200Y, as management
considers all amounts fully collectible. The company’s receivables are collateralized by normal contractor
lien rights. At December 31, 200X and 200Y, no contractor lien rights have been exercised by the
company.
C. Significant Concentrations of Credit Risk
Concentrations of credit risk can include a group of customers with similar activities or similar
characteristics that can affect their ability to pay their debts. For example, customers can be from the
same industry or geographic region. Disclosure requires the nature of the group, maximum credit loss
exposure, and information about any collateral obtained. For many small businesses, sufficient
disclosure may just incorporate a description of the business, including location, and whether credit is
granted to customers.
Note 1: Summary of Significant Accounting Policies -- Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist
principally of accounts receivable, which at December 31, 200X consist entirely of receivables from
software retailers. At December 31, 200X, 10 customers constitute 80 percent of the Company’s total
accounts receivable.
D. Factored Receivables
Note X: Accounts Receivable
In accordance with a factoring agreement, the Company sells a significant portion of its accounts
receivable to a factor without recourse. The factor charges the Company a commission of 0.5 percent of
factored sales, with a minimum commission of $3 per invoice, which amounted to $XX and $YY in 200X
and 200Y, respectively. Accounts receivable factored at December 31, 200X and 200Y were $XX and
$YY, respectively.
E. Other Receivables
Other less-common specific disclosures which may be required for a company include:
•
Unearned discounts, finance charges and interest;
•
Unbilled receivables (e.g., unbilled costs and fees under cost plus fixed fee contracts);
•
If a note is a non-interest bearing note, or has an inappropriately stated interest rate, the
following should be disclosed: (i) the discount or premium; (ii) the effective interest rate
and face amount of the note; (iii) amortization of discount or premium; and (iv) issue
costs;
•
Amounts of any commitments to lend additional funds to debtors owing restructured
troubled receivables; and
•
Inclusion of trade receivables not due within one year in current assets in accordance
with trade practice, including the reason for such inclusion and the amount.
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III. Special Considerations for Specific Industries
A. Not-for-Profit Organizations
Not-for-profit organizations should record contributions in the fiscal year that it receives a contribution
(cash or other assets), including unconditional promises to give. Generally, there can be no donorimposed conditions on whether or not the not-for-profit organization gets to keep the asset (e.g.,
organization must raise an additional $100,000 from other sources or must return the funds) in order to
recognize the revenue. If contributions are received with conditions attached, the contribution is generally
established as a liability (i.e., deferred revenue) until such condition is met and revenue can be
recognized. If a contribution is received and the condition attached has a remote chance of being
realized (e.g., if it snows in Florida next year), then the amount should be established as a liability
account other than deferred revenue (e.g., Refundable Advance or Amount Refundable to Donor or
something similar). However, there can be donor-imposed restrictions (e.g., must be used to build a
building, must be used to support a particular program, or must be used the next fiscal year). Restrictions
on when or how the contribution can be spent are reflected in whether the revenue is categorized as
unrestricted, temporarily restricted, or permanently restricted revenues in the statement of activities -- not
whether the amount gets recorded at all.
An unconditional promise to give (i.e., pledge) is a written or oral agreement to give cash or other assets,
as long as there is sufficient evidence in the form of verifiable documentation that a promise was made
and received (which can be a matter of judgment). Typically, standardized forms and letters are
recommended to be used by the not-for-profit to document unconditional promised to give, and allow
recording of the related receivable. Pledges are recorded at the present value of the estimated future
cash flows, so amounts expected to be received greater than one year away should be discounted to
their present value using the discount rate at the time of the pledge. Once recorded, the discount rate on
the pledge is not adjusted from year to year. Pledges should also be recorded at their net realizable
value, just as other receivables are recorded. Therefore, an allowance for uncollectible pledges should
be established based on donor experience of what is actually paid versus what is promised to be paid.
B. Local Governments
Generally, the most significant accounts receivable for a local government unit’s governmental fund types
are property taxes and taxes collected and remitted by another governmental unit (e.g., sales or franchise
taxes collected by the county or state). Confirmation of property taxes receivable is often not an effective
audit procedure. Substantial portions of property taxes are paid for by mortgage companies from escrow
accounts, so individual property owners historically do not respond to confirmation requests because they
do not have all the details readily available. In addition, mortgage companies are inundated with
confirmations at year-end and rarely return confirmation requests. While the reason for not sending
confirmations of property tax receivables should be documented in the workpapers, the reasons can
generally be justified. Alternatively, taxes collected by other governmental units often are best addressed
by confirmation. Generally, the confirmee can verify amounts collected and transmitted to the
governmental unit being audited, as well as amounts collected that have yet to be remitted at year-end.
A governmental unit’s proprietary fund types provide services to customers, such as water, sewer,
electricity, and sanitation. Confirmation of a selection of individual customer accounts is generally
performed, and supported by subsequent collections for remaining audit evidence. Subsequent
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collections tend to be persuasive audit evidence, as the collection cycle for these services tends to be
relatively short.
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Auditing Accounts Receivable
LEARNING QUESTIONS
1.
Accounts receivable existence tends to be a significant identified risk requiring special audit
consideration if management is likely to do which of the following?
A.
B
C.
2.
Which of the following is NOT a significant accounts receivable that should be properly disclosed
in the financial statements?
A.
B.
C.
3.
B.
C.
Examining cash receipts prior to the confirmation date, including deposit slips and
remittance advices.
Examining cash receipts after the confirmation date, including deposit slips and
remittance advices.
Examining shipping documents after the balance sheet date.
Documentation about collateral pledged to secure payment of significant delinquent accounts
receivable balances would give evidence about which assertions?
A.
B.
C.
7.
Trade accounts receivable.
Notes receivable.
Other assets.
Alternate procedures for confirmation nonreplies would typically include which of the following?
A.
6.
Rights and obligations.
Completeness.
Existence or occurrence.
Past-due trade accounts receivable that have been converted to installment plans should be
classified as which of the following?
A.
B.
C.
5.
Pledged accounts receivable.
Assigned accounts receivable.
Tethered accounts receivable.
Which assertion for revenue-related accounts is often the most difficult assertion to test?
A.
B.
C.
4.
Overstate earnings.
Understate earnings.
Understate assets.
Existence and valuation.
Completeness and cutoff.
Cutoff and valuation.
If the client has a valid reason not to send a confirmation to a specific account, the auditor would
likely respond in which manner?
A.
B.
C.
Not modify the audit opinion, if sufficient appropriate alternative audit evidence can be
obtained.
Refer to a scope limitation in the audit opinion.
Withdraw from the engagement.
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8.
Negative confirmations would NOT be acceptable for which of the following situations?
A.
B
C.
9.
Individually significant items.
Risk of material misstatement is low.
Large number of small balances.
When misstatements are identified in confirmations tested through sampling, the misstatements
are projected to which of the following?
A.
B.
C.
The total account balance.
The population subjected to sampling.
The total of items tested.
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Auditing Accounts Receivable
HOMEWORK
Designing Internal Control System Related to Accounts Receivable -Case Study
Instructions: Design a system of internal control activities for Carr Parts Company related to the orders,
billing, accounts receivable, and cash receipts processes. For the key controls listed below, designate
which of the key parties at the Company will most directly assume each responsibility. For example,
Horace Cope would most likely approve sales orders, so the number 1 would be placed under his
column. Designate the control by placing the control number in the related column. If the key control
relates to establishing policy or making a business decision, place the control next to the individual that
would be primarily responsible for that decision.
Orders
1. Sales orders (including pricing, payment terms, and extended credit) are approved by an appropriate
party.
2. Unshipped orders are monitored and followed-up on.
3. Sales orders, shipping documents, invoices, and credit memos are all pre-numbered, with the
sequencing periodically accounted for.
4. Unused and voided documents are controlled and periodically accounted for.
5. Quantities of goods shipped are verified against shipping documents.
Billing
6. The company has established credit policies.
7. The credit function is independent of the billing function.
8. Billing is independent from cash processing, accounts receivable bookkeeping, shipping, and
inventory management.
9. Shipping is independent of cash processing and accounts receivable bookkeeping.
10. Invoices are compared against sales orders and shipping documents before recording.
11. Invoices are recomputed before recording and are agreed to the approved price lists.
12. Sales commissions are recorded on actual recorded sales so that monitoring of recorded sales by
recipients of sales commissions will result.
13. Cut-off procedures are designed and monitored for operating effectiveness.
14. Daily billing totals are compared to subsidiary ledger postings.
15. Quantities shipped are periodically reconciled to quantities billed.
16. Shipments not yet billed are tracked and monitored against billing records.
17. Actual sales compared to budgeted expectations are periodically analyzed and followed up on by an
appropriate party.
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Accounts Receivable Subsidiary Ledger
18. Accounts receivable subsidiary ledger maintenance is independent of general ledger maintenance.
19. Accounts receivable subsidiary ledger reconciliation to the general ledger is periodically reviewed by
an appropriate party.
20. Customer complaints and billing questions are followed-up on by persons independent of accounts
receivable bookkeeping and cash processing.
21. Credit memos are properly supported by receiving reports or other documentation.
22. Credit memo recording and approval are performed by persons independent of accounts receivable
recording and cash processing.
23. Credit memos and customer account write-offs are approved by an appropriate party independent of
credit memo and accounts receivable recording and cash processing.
24. Customer account statements are periodically reviewed by an appropriate party before mailing.
25. Customer account statements are mailed by someone other than the person responsible for accounts
receivable bookkeeping.
26. Total credits to accounts receivable are periodically reconciled to cash receipts.
27. Aged accounts receivables are periodically reviewed by an appropriate party.
28. Allowance for doubtful accounts is periodically reviewed for adequacy by an appropriate party.
Cash Receipts
29. The company uses a lockbox to process cash receipts, to reduce access to cash, and improve
timeliness of deposit.
30. The mail is opened and daily deposits are prepared by someone independent of cash receipts
bookkeeping.
31. List of daily deposits is reconciled to recordings to total credits to customer accounts receivable
accounts, or other relevant financial statement accounts, by an appropriate party.
32. Cash receipts are secured and deposited on a timely basis.
33. Checks received are marked as “For Deposit Only” immediately upon receipt.
34. Adjustments to cash accounts are approved by an appropriate level of management.
35. Cash receipts are analytically reviewed by an appropriate level of management on a periodic basis
(e.g., compared to budget and/or prior period).
36. Transactions are reviewed for proper recording as to account, amount, and period by an appropriate
party.
37. Bank accounts are reconciled on a timely basis by someone independent of cash disbursements and
cash receipts recordkeeping functions.
38. Bank reconciliations are reviewed on a timely basis by an appropriate level of management, including
support for significant or unusual reconciling items.
39. Bank statements (with enclosures) are received directly by the appropriate level of management and
are reviewed before being routed to the person responsible for initial preparation of bank
reconciliations.
cpenow.com / [email protected]
13
Copyright © 2015 Surgent McCoy Self-Study CPE, LLC – A2M2/15/S1
Part 1 -- You have the following people available to allocate tasks/responsibilities to:
Iona Carr -- Owner/President
Norma Lee -- CFO
Otto Mobile -- Accounting manager
Willy Makit -- Bookkeeping clerk
Horace Cope -- VP of Sales
Sandy Beech -- Receptionist
Anita Shave -- Production and shipping manager
Iona
Norma
cpenow.com / [email protected]
Otto
Willy
14
Horace
1
Sandy
Anita
Copyright © 2015 Surgent McCoy Self-Study CPE, LLC – A2M2/15/S1
Part 2 -- You have the following people to allocate tasks/responsibilities to:
Iona Carr -- Owner/President
Otto Mobile -- Accounting manager
Willy Makit -- Bookkeeping clerk
Horace Cope -- VP of Sales
Sandy Beech -- Receptionist
Anita Shave -- Production and shipping manager
Iona
cpenow.com / [email protected]
Otto
Willy
Horace
1
15
Sandy
Anita
Copyright © 2015 Surgent McCoy Self-Study CPE, LLC – A2M2/15/S1
Part 3 -- You have the following people to allocate tasks/responsibilities to:
Iona Carr -- Owner/President
Willy Makit -- Bookkeeping clerk
Horace Cope -- VP of Sales
Sandy Beech -- Receptionist
Anita Shave -- Production and shipping manager
Iona
cpenow.com / [email protected]
Willy
Horace
1
16
Sandy
Anita
Copyright © 2015 Surgent McCoy Self-Study CPE, LLC – A2M2/15/S1