A.

CONSIDER INTERNAL CONTROL OVER RECEIVABLES AND REVENUE

1. Obtain an understanding of internal control over receivables and revenue a. Prepare a written description or flowchart and the completion of an internal control questionnaire. b. Determine whether the client is actually using the policies and procedures- that is, whether they have been placed in operation. c. Observe whether there is an appropriate segregation of duties and inquire as to who performed various functions throughout the year. d. Review revenue budgets and the follow-up on the variances; perform a walk-through of the cycle; inspect various documents, and review document files. e. Gain evidence that provides basis to assess control risk for certain financial statements assertions about receivables and revenue at less than maximum. f. Consider the types of misstatements of these accounts that may occur. 2. Assess control risk and design additional tests of controls for receivables and revenue. a. Obtain additional evidence about the operating effectiveness of the clients controls by designing additional tests of controls. 3. Perform additional tests of controls for those controls which the auditors plan to consider to support their planned assessed level of control risk, such as: a. Examine significant aspects of a sample of sales transactions. i. Compare the customers purchase order, the clients sales order, and the duplicate copy of sales invoice ii. Compare the date of each invoice with two other dates: (1) date of related shipping document and (2) the date of entry in the accounts receivable subsidiary ledger. iii. Investigate the controls for sales to related parties. b. Compare a sample of shipping documents to related sales invoice. i. Examination of selected sales transactions and a comparison of the invoices with sales records and shipping documents. c. Review the use of authorization of credit memoranda. d. Test computer application controls. i. Inspect evidence of the operations control groups reconciliation of batch control totals for sales transactions, and follow-up on any transactions that are listed on exception reports. ii. Observe application of Input validity tests as sales transactions are entered. iii. Enter test data to obtain additional evidence about performance of application controls. e. Examine evidence of review and approval of revenue estimates. 4. Reassess control risk and design substantive tests.

B. PERFORM SUBSTANTIVE TESTS OF RECEIVABLES

5. Obtain an aged trial balance of trade accounts receivable and analyses of other accounts receivable and reconcile to ledgers. Clerical Accuracy Test the arithmetical accuracy of the aged trial balance and the aging categories therein. Reconcile the total balance to the general ledger control account balance. Note and investigate any unusual entries. Summarize the total of credit balances and make appropriate reclassification entry, if material. On a selective basis, trace individual account balances in the aged trial balance to individual subsidiary ledgers and vice versa.

Determine which accounts receivable should be confirmed (for example, all individually significant items and judgmentally or randomly selected items from the remaining balance).

6. Obtain analyses of notes receivable and related interest. Clerical Accuracy For notes and accounts receivable with maturities greater than one year, perform the following procedures: For significant notes receivable, test the reasonableness of interest earned and any prepaid or accrued interest receivable. Evaluate whether the interest and contractual principal payments will be collected in accordance with their contractual terms. If either interest or principal payments will not be collected in accordance with their contractual terms, determine whether an allowance for credit loss has been computed using one of the following methods: o The present value of expected future cash flows discounted at the receivables effective interest rate. o The receivables observable market price. o The fair value of the collateral (if the receivable is collateral dependent) Review notes receivable to determine if any interest should be imputed for significant balances that are due in excess of one year from the balance sheet date. Also consider proper balance sheet classification of such receivables.

7. Inspect notes on hand and confirm those with holders. Existence, Rights o o o o o o o Obtain list and compare inspected notes against list. Confirm notes held by others. Confirm notes receivable with issuer. Examine collateral. Examine approval for write-offs. Review credit reports concerning collectability. Review balance sheet presentation.

12. For notes with maturities greater than one year, verify interest earned and accrued interest receivable for the current year. Existence, Rights, Completeness a. Evaluate interest payments collected, earned, and receivable. i. Create an interest section that consists of four columns: 1. Beginning accrued interest receivable balance (prior years audit papers) 2. Add Interest earned during the year (computed through terms of the notes) 3. Less Interest collected during the year (traced to cash receipts records) 4. Should equal to computed accrued interest receivable at the end of the year ii.Cross-foot balances of each column and trace balances in the general ledger. b. If interest earned computed balance and accounting record balance deviate, Interest earned account deserves analysis for unaccounted-for credits.

13. Evaluate the propriety of entitys accounting methods for receivables and revenue. -Existence, Rights, Valuation a. Review if cash receipts from fees are appropriately recognized when services are rendered. b. Examine if hold transactions may be recordedwhen they do not meet the requirements for revenue recognition. c. Test if management uses percentage-of-completion method of revenue recognition in appropriate circumstances. d. Test if the amount of revenue earned might be overestimated. e.Review notes that do not bear interest rates at the time of acceptance, discount notes to present value. 14. Evaluate accounting estimates related to revenue recognition. - Valuation a. Evaluate reasonableness of accounting estimates: i. Review and test succeeding transactions and other events that may provide confirmation on the accuracy of the estimates.