ABC Company

Audit Program – Receivables

Department:

AUDIT OBJECTIVES:

To determine whether:
1. Receivables represent all amounts owed to the entity at the balance sheet date and have been properly recorded.
2. The allowances for doubtful accounts, returns and allowances and discounts are adequate but not excessive.
3. Receivables are properly described and classified and adequate disclosures with respect to these amounts
(including disclosures of amounts that have been pledged, discounted or sold with recourse or are with related
parties) have been made.

AUDIT PROCEDURES:

WP Done
Procedures By Date
Ref. Y/N?

1) ANALYTICAL PROCEDURES—GENERAL

a) Compare the balance of each significant receivable

account with the comparable balance for the preceding
period. Investigate significant or unusual fluctuations.

b) Compute the receivables turnover ratio (average

receivables to net revenues) for the current period.
Compare with the comparable ratio for the preceding
period and consider its reasonableness in relation to
revenue volatility, credit policy, collectability, etc.
Investigate significant or unusual fluctuations.

c) Compute the average number of days of revenues in

receivables for the current period. Compare with the
comparable ratio for the preceding period and with
industry statistics. Investigate significant or unusual
fluctuations.

2) TESTS OF THE RECEIVABLES SUBSIDIARY LEDGER

a) Have the client prepare a reconciliation of the

receivables subsidiary ledger to the general ledger
control accounts as of the circularization or balance
sheet date. Verify the clerical accuracy of the
reconciliation and test it as follows:

i) Trace control account totals to the general ledger

and subsidiary ledger totals to their source.
ii) Examine supporting documentation for significant
or unusual reconciling items. Scope:( )

b) Foot or test foot the subsidiary ledger to ensure that all

recorded receivables balances are included in the totals.

c) Scan the subsidiary ledger for unusual balances or

amounts (e.g., credit balances, amounts due from related
parties, etc.). Investigate and examine supporting
documentation, as appropriate. Consider including such
accounts in the circularization scope.

3) TESTS OF TRANSACTIONS OF RECEIVABLES

 a) Have the client prepare an analysis of the activity in the
general ledger control accounts from the interim date to
the balance sheet date. Test the activity as follows:

i) Compare the levels of the various types of activity

(e.g., revenues, collections, etc.) in the accounts
with the comparable amounts for prior and
subsequent interim periods for the current and
preceding periods. Investigate significant trends or
fluctuations.
ii) Review the general ledger entries for
reasonableness. Obtain explanations for and inspect
underlying accounting data (registers, journals or
journal entries) for general ledger entries that appear
to be unusual in nature, source or amount.
iii) Trace the general ledger entries to the sources of
original entry. Scan the books of original entry for
transactions that appear unusual in nature, source or
amount. Examine underlying support as appropriate.
Scope:( )

c) Have the client prepare a reconciliation of the

receivables subsidiary ledger to the general ledger
control accounts as of the balance sheet date. Verify the
clerical accuracy of the reconciliation and test it as
follows:

i) Compare the nature and amount of reconciling

items with the comparable items as of the interim
date. Investigate significant or unusual fluctuations.
ii) Trace individual receivable balances from the
subsidiary ledger to the detail receivable records.
Test the clerical accuracy of the detail records.
Scope:( )

d) Scan the receivables subsidiary ledger and consider

circularizing or performing alternative procedures on
significant outstanding balances not previously
confirmed.

4) EVALUATION OF THE ADEQUACY OF THE

ALLOWANCE FOR DOUBTFUL ACCOUNTS

a) Evaluate the following items and their impact on our

review of the adequacy of the allowance for doubtful
accounts. Document in a memorandum your findings
related to:

• Changes in the client's credit and collection

policies that have occurred during the audit period,
including changes that have since been reversed or
modified.
• Impact of new products or new markets and
whether they involve a different, higher-risk
customer.
• General economic conditions and trends
adversely affecting the client's customers.
• Other ratios, trends or relationships that are
 unique to the client or its industry which relate to
receivables valuation.
• Changes in methods, definitions or criteria for
aging accounts that might affect comparability of
the data.

b) Have the client prepare an analysis of the allowance for

doubtful accounts for the current audit period. Verify the
clerical accuracy of the analysis and test it as follows:

(1) Cross-reference the provision for the current

period to the appropriate expense lead schedule.

(2) Compare the provision, write-offs, recoveries

and the ending balance for the current period
with the comparable amounts for the preceding
audit period. Investigate significant or unusual
fluctuations.

(3) Test write-offs during the current period as

follows:

(a) Review the listing of accounts written off

and reconcile the totals with the amounts
charged to the allowance for doubtful
accounts.

(b) Determine whether proper approvals were

obtained for selected write-offs. Scope:( )

c) Obtain a copy of the client's aging of receivables. Test

the aging as follows:

i) Test the clerical accuracy of footings and cross

footings. Scope:( )
ii) Compare the aging statistics with those of prior
periods. Investigate significant trends or
fluctuations.
iii) Trace the aging information for selected accounts to
subsidiary ledgers and to supporting critical forms
and documents ( ). Concentrate the test on
accounts reflected as "current." Recalculate the
aging of the account balances. Scope:( )
iv) Be alert for receivables that should be written off,
under the client's criteria.

d) Have the client prepare a listing of individual large

and/or past due receivables for specific review of their
probable collectability. The client's evaluation of each
receivable and subsequent cash collections should be
indicated on the schedule. Scope:( )

i) Relate the totals of individual receivables listed to

the client's aging of receivables. Ensure that
significant past due receivables are not omitted from
the listing.
ii) Trace subsequent cash receipts to the cash records
and examine remittance advices. Scope:( )

iii) Identify any customers with "locked-in" receivable

 positions and consider the implications thereof.
iv) Discuss the accounts with informed client personnel
to obtain additional background information.
v) If additional work is necessary to satisfy yourself
regarding the probable collectability of an unpaid
balance, consider the following:

(1) Review credit and collection files and the

debtor's or customer's financial statements.

(2) Obtain reports of credit bureaus or credit

reporting companies.

vi) Identify a range of specific allowances required for

the total individual receivables reviewed.

e) To provide a basis for identifying a range of general

allowances required for receivables not individually
reviewed above, perform the following analytical
procedures:

i) Calculate the percentages of the allowance for

doubtful accounts to total receivables and to
receivables aged over 60 days. Compare with
similar percentages for prior periods. Investigate
significant fluctuations or trends.
ii) Calculate the percentage of accounts written off to
credit sales and average receivables for the period.
Compare with the similar percentages for prior
periods. Investigate significant fluctuations or
trends.
iii) Calculate the percentage of the provision for
doubtful accounts to gross sales. Compare with the
similar percentage for prior periods and with
industry statistics. Investigate significant
fluctuations or trends.
iv) Based upon the above percentages, the review of the
aging and historical write-off statistics, identify a
range of general allowances required for receivables
not specifically reviewed above.

f) Summarize the results of our specific and general review

of the collectability of receivables and determine an
acceptable range of adequacy of the allowance for
doubtful accounts. Adjust the identified range for other
factors identified above that influence the collectability
of receivables.

g) Compare the balance of the allowance for doubtful

accounts as of the balance sheet date with the acceptable
range determined above. Propose an adjustment, as
appropriate, to ensure that the allowance falls within the
acceptable range.

5) EVALUATION OF THE ADEQUACY OF

ALLOWANCES FOR SALES DISCOUNTS, RETURNS
AND ALLOWANCES

b) Review the client's current policies regarding sales

discounts, returns and allowances. Examine selected
 sales contracts to verify return policies and terms.
Identify changes from the prior period and evaluate the
effect of these changes.

c) Have the client prepare an analysis of the allowances for

sales discounts, returns and allowances for the current
period. Verify the clerical accuracy of the analysis and
test it as follows:

i) Cross-reference the provision for the current period

to the appropriate expense lead schedule.
ii) Compare the activity for the current period with the
comparable amounts for the preceding audit period.
Investigate significant or unusual fluctuations.
iii) Examine remittance advices and revenue invoices
for significant discounts to determine whether
discounts allowed are consistent with the client's
policies.
iv) Investigate credits representing sales returns or
discounts for amounts that appear abnormal.
v) Verify that sales returns and allowances have been
properly authorized.
vi) Review the accounting for the numerical sequence
of documents supporting goods returned by
customers, claims made and credit memoranda.

d) To provide a basis for evaluating the adequacy of the

allowances for sales discounts, returns and allowances
perform the following analytical procedures:

i) Calculate the percentage of the allowances for sales

discounts, returns and allowances to total
receivables. Compare with similar percentages for
prior periods and with industry statistics. Investigate
significant fluctuations or trends.
ii) Calculate the percentage of customer discounts,
returns and allowances for the current period to
gross sales. Compare with similar percentages for
prior periods and with industry statistics. Investigate
significant fluctuations or trends.
iii) Relate the percentages calculated in the previous
steps and investigate significant differences between
them.

e) Inquire of knowledgeable client personnel whether there

have been (1) problems with product design or
production which have resulted (or are expected to
result) in higher than normal returns and allowances or
(2) an extension of the period covered by the right-of-
return policy. Evaluate the magnitude of returns
subsequent to the balance sheet date for evidence of
production problems during the audit period.

f) Review significant sales returns and credit memos issued

subsequent to the balance sheet date to determine
whether they were properly authorized and recorded in
the proper period.

g) Based upon the information gathered, evaluate the

adequacy of the allowance for sales discounts, returns
 and allowances. Propose an adjustment, as appropriate.

5) NOTES AND LOANS RECEIVABLE

a) Have the client prepare a listing of notes and loans

receivable, acceptances and other instruments
evidencing indebtedness to the client. Test the listing as
follows:

i) Test the clerical accuracy of the footings of the

listing and trace the totals to the general ledger
control accounts.
ii) Control undeposited cash receipts to the depository.
Determine whether the deposit appears as an in-
transit item on the bank reconciliation of the proper
account and that it was accepted by the depository
without material subsequent adjustment.

b) Trace the information on the schedule to detailed

records, on a test basis. Scope:( )

c) Verify the payee, endorser, maker, principal amount,

original date, maturity date and interest rate of selected
notes by examining the actual notes. Examine any
collateral. Scope:( )

d) Identify notes from trade debtors or customers and

evaluate the need for separate classification in the
financial statements.

e) Consider the collectability of the unpaid balances of

notes and loans receivable during the review of the
adequacy of the allowance for doubtful accounts.

i) Discuss the origin of the balances with the client

and evaluate the adequacy of any collateral pledged.
ii) Determine whether payments have been made on a
timely basis during the period and are not past due
at the balance sheet date.

f) For notes or loans receivable with terms greater than one

year, test the classification between current and
noncurrent. Consider classifying any notes in dispute or
litigation entirely as noncurrent.

6) INTERCOMPANY RECEIVABLES

a) Obtain an understanding of the nature of the

intercompany receivables, including the following:

• How they arose.

• How they are being or are to be liquidated.
• What security exists.
• What the funds were used for.
• What the tax implications are.

b) If the transactions are other than routine transfers of

goods and services, inspect supporting critical forms and
documents ( ). Scope:( )

c) Tie amounts to the intercompany payables reflected in

 the audit working papers for the affiliates. If the
intercompany accounts are not in balance, have client
personnel prepare reconciliations. Examine support for
significant or unusual reconciling items. Propose
adjustments for unrecorded transactions, if appropriate.

d) Cross-reference the balances to the elimination entry for

consolidation.

7) INTEREST RECEIVABLE

a) Have the client prepare an analysis of activity in the

interest receivable accounts related to notes, loans or
past due trade receivables during the period. Verify the
clerical accuracy of the analysis and test it as follows:

i) Cross-reference interest income for the period to the

appropriate lead schedule.
ii) Compare interest income for the period and the
period-end interest receivable balance with
comparable amounts for the preceding period.
Investigate significant or unusual fluctuations.
iii) Perform a predictive test of interest income for the
period, based on the average balance of notes, loans
or past due trade receivables outstanding during the
period and the average stated interest rate.
Investigate significant differences between the
predicted and recorded amounts.

b) Consider the collectability of the interest receivable

during the review of the collectability of the related
receivables.

8) OTHER RECEIVABLES

a) Review other receivables. Consider the need to confirm

amounts or to examine supporting documentation.
Scope:( )

9) ANSWER INTERNAL CONTROL QUESTIONNAIRES (ICQ B-1

and B-2)

10) SUPERVISION, REVIEW AND CONCLUSIONS

a) Conclude responsive to the audit objectives.

b) Prepare points regarding internal controls and other
business matters.
c) Perform senior review and supervision.
d) Clear senior review points.
e) Clear manager review points.

PERFORMED BY: REVIEWED BY:

Audit Assistant Audit Supervisor