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2. Sales cutoff test. Trace shipping documents immediately prior and just after
accounting period to the accounting records. Focus on FOB shipping point and FOB
destination.
3. Cash receipts cutoff test. Trace daily remittance of payments to accounts
receivable credits.
4. Trace shipping documents to sales invoices and accounting entries to
determine if sales were recorded appropriately.
5. Account for numerical of numbered documents.
6. Apply analytical procedures. Compare ratios of this period to prior periods,
budgets, and industry averages.
C. Rights and Obligations. Does the client company have the right to collect the
receivables?
1.
1.
Evaluate the balance sheet and income statement for proper classification.
2. Read footnotes. Disclosures about factoring and pledging and related party
transactions.
3. Obtain and evaluate the management representation letter concerning the
revenue/receipt cycle.
III.
A. Sales Returns and Allowances. Were returns properly authorized? Were goods
returned? Auditor examines receiving reports, credit memos, and entries in the
accounting records.
B. Bad Debt Expense. Are writeoffs properly authorized? Evaluate allowance
account and estimating procedures for determining size of allowance. Evaluate
accounts that have been written off and examine aging schedule for potential
additional writeoffs. Mail confirmation requests to customers that have been written
off (there should not be a response).