COA Ch 11 Accounts Receivable, Notes Receivable, and Revenue

Sources of Accounts Receivable

Sources:

• Claims against customers from sale of goods or services.

• Loans to officers or employees.

• Loans to subsidiaries.

• Claims against various other refunds.

• Claims for tax refunds.

• Advances to suppliers.

Shown on balance sheet at net realizable value.

Sources of Notes Receivable

Nature:

• Substantial loans to individuals or companies.

• Installment note or contract can allow seller to hold lien on goods. Examples:

  • Sale of industrial machinery, or farm equipment.

• Loans to subsidiaries or other types of related companies.

• Loans to officers, employees.

Audit Risk of Receivables

Audit risk significant because:

• Many incidences of fraud have involved overstatement of receivables and revenue.

• Revenue recognition may be based on complex accounting rules.

  • Examples—long term contract accounting multiple element arrangements

• Receivables and revenues are usually subject to valuation using significant accounting estimates.

Objectives for the Audit of Receivables and Revenue

1. Use the understanding of the client and its environment to consider inherent risk, including fraud risks, related to receivables and revenues.

2. Obtain an understanding of internal control over receivables and revenues.

3. Assess the risks of material misstatement and design tests of controls and substantive procedures that:

   • Substantiate the existence of receivables and the occurrence of revenue transactions.

   • Establish the completeness of receivables and revenue transactions.

   • Verify the cutoff of revenue transactions.

   • Determine that the client has rights to recorded receivables.

   • Establish the proper valuation of receivables and the accuracy of revenue transactions.

   • Determine that the presentation and disclosure of receivables and revenue are appropriate.