SAMPLE AUDIT PROGRAM FOR TRADE ACCOUNTS AND NOTES RECEIVABLE
I. Audit Objectives:
A. Determine that the trade accounts and notes receivable represent bona fide receivables and are valued properly (Existence and Valuation).
B. Determine that the allowances for doubtful accounts are adequate and reasonable (Valuation).
C. Determine the propriety of disclosures pertaining to pledging, assigning, and discounting of receivables (Presentation and Disclosure).
D. Determine the correctness of the recorded interest income that is attributable to accounts and notes receivable (Completeness).
E. Determine that receivables are properly classified in the balance sheet (Presentation and Disclosure).
II. Audit Procedures:
A. Scan general ledger accounts in order to identify significant and unusual transactions.
B. Compare opening general ledger balances with closing general ledger balances of the prior period.
C. Perform analytical procedures by evaluating the relationships between: (1) receivables and sales and (2) notes receivable and interest income attributable thereon.
D. With respect to the aged trial balance prepared by accounting personnel:
Verify extensions and footings;
Trace the total of the aged trial balance to the general ledger control total;
Trace selected entries on the aging schedule to respective accounts in the subsidiary ledger;
Trace selected subsidiary ledger balances to the aging schedule;
Verify extensions and footings in subsidiary ledger accounts;
Investigate negative (i.e., credit) balances.
E. Consider confirmation of account balances with customers:
Select accounts for positive confirmation;
Select accounts for negative confirmation;
Control confirmation requests by mailing in internal audit department envelopes and with the return address of the internal audit department. Consider using a post office box to ensure that unauthorized individuals cannot tamper with responses;
After 14 days, mail second requests to all those not replying to a positive request;
Investigate all accounts for which envelopes are returned as undeliverable;
Reconcile differences reported by customers;
Review accounts of significant customers not replying to a second request by examining subsequent receipts and supporting documentation (i.e., remittance advices, invoices, and/or shipping documents) in order to corroborate that the amounts represent bona fide receivables for goods or services;
Prepare a schedule summarizing the receivable confirmations as follows:
No. % Dollar Amount %
Total at Confirm Date
Total Positive Type
Total at Confirm Date Requested
Type Total Requested
Positive Exceptions Positive Clean
Total Positive Type
Total Negative Type Exceptions
F. Examine cash receipts in subsequent periods in order to identify receivables which have not been recorded previously.
G. With respect to trade notes receivable, prepare or verify schedules and analyses which detail the following:
Makers of the notes;
Dates the notes were made;
Due dates of the notes;
Original terms of repayment;
Applicable interest rates;
Balances at the end of the prior accounting period;
Additions and repayments of principal.
H. Inspect notes and confirm notes receivable discounted with banks.
I. Identify collateral and verify that such amounts are not recorded as assets.
J. Verify the accuracy of interest income, accrued interest, and unearned discount by recalculating such amounts.
K. Read pertinent documents, including the minutes of board meetings, in order to identify situations in which receivables have been pledged as collateral, assigned, or discounted and verify that such situations are disclosed in the financial statements.
L. Obtain evidence pertaining to related-party transactions which need to be disclosed in the financial statements.
M. With respect to the analysis of the allowance for doubtful accounts prepared by accounting personnel:
Ascertain that write-offs have in fact been authorized;
Ascertain the reasonableness of the allowance;
Perform analytical procedures by comparing:
- Accounts receivable to credit sales;
- Allowance for doubtful accounts to accounts receivable totals;
- Sales to sales returns and allowances;
- Doubtful accounts expense to net credit sales;
- Accounts receivable to total assets;
- Notes receivable totals to accounts receivable totals.
Consider differences between the book and tax basis for doubtful accounts expense.