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AP&P II Chapter III

Chapter Three discusses the audit of receivables, defining them as future cash collections from credit sales, and categorizing them into accounts receivable and notes receivable. It outlines essential internal controls necessary for managing receivables, including proper billing, credit approval, and separation of duties, while emphasizing the auditor's objectives such as verifying existence, completeness, and valuation of receivables. Additionally, it highlights the importance of proper presentation and disclosure in financial statements and suggests relevant audit procedures for both account and promissory forms of receivables.

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8 views12 pages

AP&P II Chapter III

Chapter Three discusses the audit of receivables, defining them as future cash collections from credit sales, and categorizing them into accounts receivable and notes receivable. It outlines essential internal controls necessary for managing receivables, including proper billing, credit approval, and separation of duties, while emphasizing the auditor's objectives such as verifying existence, completeness, and valuation of receivables. Additionally, it highlights the importance of proper presentation and disclosure in financial statements and suggests relevant audit procedures for both account and promissory forms of receivables.

Uploaded by

zelalem
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter Three

AUDIT OF RECEIVABLES
Meaning and types of Receivables
 Receivables are future cash collections as a
result of sales of goods or services on credit.
Receivables may be either account form like
Account Receivable or promissory note form
such as Notes Receivable
Internal control over Receivables
The following are the relevant internal control over Receivables.
• All orders received are billed properly
• Credit is approved before goods are released for shipment
• Customers are correctly billed for all merchandises released by the shipping
department
• All receivables resulting from completed sales transactions are correctly
recorded
• Credits for returns, allowances, and bad debts write-off are properly authorized
• Amounts receivables from customers are collected, if at all possible
• Collections on receivables are fully accounted for
• Reports which adequately summarized sales and credit activities and reveal the
current status of uncollected receivables are made periodically
• There must be separation of duties over receivable transactions
• Receipts should be pre-numbered
Cont’…….
 Proper internal control of receivables requires
proper accounting and control for returned
merchandises and an approval for write-for
uncollectible accounts as a bad debt
Periodically, the receivables should be aged in
order to determine the effectiveness and
actions of the credit and collection
departments
Audit objectives over Receivables
The following are the auditor’s objectives over receivables.
 To consider internal control over receivables
 To verify the existence of receivables
 To establish the completeness of receivables
 To determine whether the client has the right on
receivables
 To establish the clerical accuracy of records and supporting
schedules for receivable transactions
 To determine the appropriateness of valuation receivables
 To determine the adequacy of disclosures in relation to
receivables
Cont’….
• Thus, to achieve good internal control over
receivables, the following assurances should
be performed:
 Validity: validity and accuracy of the
accounting records gained from the system of
internal control and the examinations of
business transactions ascertain the
reasonableness of the account balances
Cont’…..
• The auditor, to ascertain reasonableness of
account balances, must relate account
balances with sales, credit terms, material
increase or decrease in receivable balance in
comparison with increase or decrease in sales
Cont’….
 Valuation: valuation is ascertained of
receivables whether or not they are correctly
valued or their balance is correct.
 To do this the auditor can recalculate the
ending balance of receivables
Cont’…..
 Completeness: the auditor should determine
that the supporting records represent the
amount of receivables stated in the balance
sheet.
 The detailed accounting records and the
controlling accounts that provide the amount
shown in the financial statement should
correspond
Cont’….
 The auditor, therefore, should verify that the
supporting documents represent the amount
of receivables in the balance sheet by
providing the trial balance and the subsidiary
ledgers as they represent the actual amount
of the accounts
Cont’…
 Presentation and disclosure: receipts have
been classified and disclosed under
appropriate account heads in the financial
statements. The disclosure of receipts in the
financial statement should be in accordance
with recognized accounting principles and
relevant statutory requirements
Audit procedures for Receivables audit

Assignment III briefly explain the relevant audit


procedures for the audit of :
i. Account form of Receivables
ii. Promissory form of receivables

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