456 Chapter Eleven
Illustrative Audit Case: Keystone Computers & Networks, Inc. Part III: Substantive Tests—Accounts Receivable and Revenue This part of the audit case illustrates the manner in which the auditors design substantive tests of balances. The substantive tests are illustrated for two accounts—receivables and revenue. This aspect of the audit is illustrated with the following audit documentation: • ABC’s risk assessment working paper that combines the auditors’ assessments of inherent and control risks into an overall risk of material misstatement for the assertions. • The substantive audit program of accounts receivable and revenue. • The audit sampling plan for the conﬁrmation of accounts receivable. Adams, Barnes & Cos. assessment of control risk is described in Part II of the audit case on pages 441 through 454. To refresh your knowledge of the case, review that part as well as Part I on pages 213 through 220 of Chapter 6.
Risk Assessment—Revenue Cycle
Client: Keystone Computers & Networks, Inc. Financial Statement Date: 12/31/X5
RA-8 WL 11/24/X5
Existence of receivables and occurrence of revenue transactions Completeness of receivables and revenue Rights to receivables Valuation of receivables Presentation and disclosure
Overall Risk of Material Misstatement
Fraud risk Moderate High Fraud risk Moderate
Moderate Low Moderate Moderate Maximum
High Low Moderate/High High Moderate
Fraud Risks: Description: Management may be motivated to overstate revenue and receivables to improve ﬁnancial results due to impending sale of
Controls: Because Keystone is a nonpublic company without an independent board or audit committee, there are no signiﬁcant internal
controls to prevent management from overstating results. Audit Response: The nature, timing, and extent of audit procedures will be modiﬁed as described below: a. Accounts receivable will be conﬁrmed at year-end using a 5 percent risk of incorrect acceptance. b. A review of the monthly sales reports by salesperson will be performed to identify any unusual individual sales or sales volume. c. Credit ﬁles of customers with large receivables (over $25,000) will be reviewed for indications of ﬁctitious customers.
Accounts Receivable, Notes Receivable, and Revenue 457
Audit Program—Substantive Tests—Accounts Receivable and Revenues
B-6 WL 11/13/X5
Client: Keystone Computers & Networks, Inc. Financial Statement Date: 12/31/X5 Performed by Procedure Sales Transactions 1. Obtain an aged trial balance of accounts receivable as of 12/31/X5. 2. Select a sample of customers’ accounts at 12/31/X5 for positive conﬁrmation using probability-proportional-to-size sampling based on the following parameters: a. Risk of incorrect acceptance of 5%. b. Tolerable misstatement of $35,000. c. Expected misstatement of $10,000. 3. Use generalized audit software to: a. Foot the master ﬁle of accounts receivable at 12/31/X5. b. Test the client-prepared aging of accounts receivable. c. Select the speciﬁc accounts for conﬁrmation. 4. Mail accounts receivable conﬁrmation requests. 5. Send second requests for all unanswered conﬁrmation requests. 6. For conﬁrmation requests to which no reply is received perform the following alternative procedures: a. Test items subsequently paid to remittance advices which identify the speciﬁc invoices paid. If necessary, reconcile the amounts paid to sales invoices and delivery receipts. b. For items not paid, inspect the invoices and delivery receipts for the sales transactions making up the account balance. 7. Resolve exceptions noted on conﬁrmation requests. 8. Review credit ﬁles for customers with accounts receivable above $25,000 at 12/31/X5. Investigate any indications of ﬁctitious accounts. 9. Summarize the results of the conﬁrmation procedures.
MP MP MP MP MP MP
1/7/X6 2/12/X6 1/7/X6 1/7/X6 1/8/X6...
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