THE NATIONAL ECONOMICS UNIVERSITY CENTER FOR ADVANCED EDUCATIONAL PROGRAMS AUDITING PROJECT Topic DISCUSSION OF AUDIT OF ACCOUNT RECEIVABLES IN FINANCIAL STATEMENT AUDIT Name NGUYỄN MỸ HẠNH Student’s[.]
THE NATIONAL ECONOMICS UNIVERSITY CENTER FOR ADVANCED EDUCATIONAL PROGRAMS AUDITING PROJECT Topic: DISCUSSION OF AUDIT OF ACCOUNT RECEIVABLES IN FINANCIAL STATEMENT AUDIT Name Student’s Code Class Supervisor : NGUYỄN MỸ HẠNH : 11141338 : AUDITING EEP 56 : ASSOC PROF DR TRAN MANH DUNG HANOI, 2017 TABLE OF CONTENTS TABLE OF CONTENTS List of abbreviations List of tables INTRODUCTION CHAPTER THEORETICAL FRAMEWORK OF AUDIT OF ACCOUNT RECEIVABLES IN FINANCIAL STATEMENT AUDIT 1.1 Account Receivables and Its Accounting 1.1.1 The Role of Account Receivables 1.1.2 The Impact of Overstating Account Receivable .2 1.1.3 Common Material Misstatement of Account Receivables .3 1.1.4 Accounting for Account Receivables .4 1.2 Audit of Account Receivables 1.2.1 Audit Objectives .4 1.2.2 Audit Process CHAPTER CURRENT SITUATIONS OF AUDIT OF ACCOUNT RECEIVABLES IN FINANCIAL STATEMENT AUDIT 13 2.1 Auditing Receivable Accounts at ABC Company implemented by Auditing and Consulting company DCPA 13 2.2 Audit Completion of Audit Receivables 29 CHAPTER ASSESSMENT AND RECOMMENDATIONS FOR IMPROVING AUDIT OF ACCOUNT RECEIVABLES IN FINANCIAL AUDIT 30 3.1 Evaluations of Audit of Account Receivables in Financial Statement Audit 30 3.1.1 Strengths .30 3.1.2 Weaknesses 31 3.2 Recommendations for Improving Audit of Account Receivable in Financial Statement Audit .31 3.2.1 The Audit Process in Audit of Accounts Receivables 31 3.2.2 Skills of auditors 31 CONCLUSION 32 REFERENCES 33 LIST OF ABBREVIATIONS Abbreviations VSA Meaning Vietnam Standards in Auditing LIST OF TABLES Table 2.1: Summary of receivables accounts .23 Table 2.2: A summary of detailed account receivables per customer 24 Table 2.3: A summary of contra account 24 Table 2.4: Account receivable confirm letter .25 Table 2.5: Detail of account receivables 27 INTRODUCTION As an integral part of the economic management system, auditing is becoming increasingly important and necessary not only for government management agencies but also for business managers, investors The information which provided by the audit is a reliable sources for the government to recognize, evaluate and properly handle the emerging economic problems and to serve as the basis for investors, managers when making business decisions In particular, auditing financial statements is one of the most characteristic types of auditing Through the information which obtained by the audit process, we can know the situation of assets, capital as well as the debt situation, payment of debt of the company With the function of verifying and expressing opinions on financial statements, financial statement audits not only function to verify the truthfulness of the information on the financial statements but also help investors, managers make the right decisions In particular, receivables are a large item on the financial statements Therefore, audit this account is very important in the audit process It tells us about the company's financial position, its ability to pay, as well as its capital position From that we can make decision whether the company is doing business effectively or not Acknowledging the importance of account receivable, I chose the topic: "Discussion of audit of accounts receivable in financial statement audit.” Apart from the introduction and the conclusion section, the audit project consists of chapters: Chapter 1: The theoretical framework of audit of accounts receivable in financial statement audit Chapter 2: Current Situations of Audit of Account Receivables in Financial Statement Audit Chapter 3: Assessment and Recommendations for Improving Audit of Account Receivables in Financial Statement Audit I sincerely thank Assoc Prof Dr Tran Manh Dung for carefully instructions that help me complete this audit project Due to the limited time and awareness, the audit project will not be able to avoid the shortcomings I am looking forward to receiving the contribution of the instructor CHAPTER 1 THEORETICAL FRAMEWORK OF AUDIT OF ACCOUNT RECEIVABLES IN FINANCIAL STATEMENT AUDIT 1.1 Account Receivables and Its Accounting 1.1.1 The Role of Account Receivables The developing of society leads to the complication of economic activity and other social relation The most economical information is finance information, which contains more risks, more variances and reliability decreases Therefore, auditing activities was created Auditing was developed in parallel with economic activities Audit plays a big role in building trust between investors, banks, stockholders, government with company Moreover, audit helps consolidate accounting activity, strengthens the national financial system and promotes economic growth The audit of financial statement is the most characteristic audit activity Financial audit is an activity to verify and express an opinion on the level of fair and reasonable present in the material aspects of the items in the financial statement on the basis of audited evidences Audit of account receivables has the same purpose Moreover, audit of account receivables contributes checking the level of accuracy of revenues and sales on credit in accounting period because it has direct relationship to each other Audit of account receivables also helps collect evidences in relation to expense accounts such as allowance for doubtful account From that, checking the accuracy of profit in accounting period Besides, account receivables is a part of assets of a company Audit this account helps auditor check partially the honesty of some assets accounts of the company and the current ratios also Accounts receivable is an account that easy to have misappropriation of assets, especially the company which has big amount of accounts receivable and those accounts receivable have lasted for many years, could lead to the situation that employee did not record the amount account receivable which was received The audit of accounts receivable and detect misstatements are necessary to decrease risks for client and improve the effective of internal control 1.1.2 The Impact of Overstating Account Receivable Accounts Receivable Reporting Accounts receivable represent the amount of cash that a business expects from its clients, the term typically pertains to credit transactions When a company overstated its accounts receivable, it mean that the company recorded more receivables than customers owed The terms “understatement” and “overstatement” generally fall under the concept of misstatement, which might invite the scrutiny of regulators as diverse as the Internal Revenue Service, the Treasury Department and the Securities and Exchange Commission Overstated accounts receivable affect not only the balance sheet but also effect on reported income and equity However, overstating accounts receivable has no effect on a company’s cash flow Balance Sheet When an organization overstates its accounts receivables, the “short-term assets” section of balance sheet increases This results in a statement of financial position that’s incorrect and not in line with accounting standards Besides accounts receivables, elements such as cash, merchandise and prepaid expenses constitute short-term resources Income Statement Overstating accounts receivables leads to overstating sales revenue, which is integral to income statement It means the reporting business made more money during accounting period, leading to higher revenues and net income Cash Flow Statement When manager prepare statement of cash flows, they translate an overstatement of the accounts receivables into a decrease in the cash account, subtracting the increase in receivables from net income A company’s receivables go down when it receives money from customers Therefore, accounts receivables increases make more income but less cash in cash flows from operating activities Statement of Shareholders’ Equity Overstating receivables account positively affects retained earnings An increase in retained earnings means an increase in the company equity statement because retained earnings are integral to the report 1.1.3 Common Material Misstatement of Account Receivables When performing audits, the auditors as well as the auditing companies are concerned about the audit risk It is the risk that the audit report does not express an honest opinion of the truthfulness and reasonableness according to material aspects of the financial statements or items on the statement This will greatly affect the image and reputation of the auditing company in general and the reputation of the auditors in particular Therefore, when conducting the audit, it is necessary to understand the nature of the item and control the risk of the audit The following is common material misstatement when auditing accounts receivable in financial audits: Reported receivables and sales could be false False sales are especially likely if: Reported income is down for the period Employee compensation or bonuses are based on profits Company intends to issue stock or borrow money in the near future Incoming cash is stolen It is done by unethical accountant by writing off receivable account as a bad debt account Lapping is carried out Cash from one receivable account is stolen and covered by cash received from another customer during the following day or two The year end cut – off of transactions is recorded incorrectly Transactions occurred near before the year end could be recorded in the following period Transactions after the end of year could be recorded early in the initial year Incorrect amount in invoices (because of mathematic errors, wrong items, wrong quantity, wrong price ) or customer is not billed at all of goods that were actually shipped 1.1.4 Accounting for Account Receivables Account receivables are accounted for in detail for each customer receivable to be collected and recorded on each payment Objects of receivables are those having economic relations with the company on relation to products, goods and services Does not record on this account sales transactions that payment is collected immediately (cash, checks, pay through the bank) Customer who pay their payable by selling their goods or services to the company , need to reach an agreement with the company about the debt clearing document In accounting for this account, the accountant must classify the debts, the payments can be paid on time In case of bad debts or uncollectible accounts at the end of the accounting period, it is necessary to set up allowance for uncollectible account or take actions to handle them In the relationship of products, goods and services, under the agreement of the company with the customer, if the goods have been delivered or the services have been provided are not in accordance with the agreement in the economic contract, the customer has the right to ask for a discount or get back money 1.2 Audit of Account Receivables 1.2.1 Audit Objectives Receivables is refer to amounts that come from sales of merchandise, services, other assets, or ass a result of a loan Generally, receivables fall into one of three following categories: Trade receivables include open accounts, notes, and installment contracts representing claims for goods and services sold in the ordinary course of business Nontrade receivables may include tax refund claims, sale of plant or equipment, or dividends receivable Related-party receivables could be come from employees, stockholders, officers, management, or affiliates Because account receivables is related to management manipulation in several ways, it often seen to have significant risk If a company is doing fraud by overstating revenues with fictitious sales, the amounts would be included in accounts receivable at period-end Therefore, if management is to overstate earnings, existence of accounts receivable will likely be a significant risk What’s more, by adjusting the valuation of recorded receivables, management can manipulate financial results The valuation of accounts receivable is an important area, where hypothesis can be challenged based on additional information obtained after the balance sheet date Which is why, when the adequacy of the allowance for doubtful accounts is a significant risk, sufficiently experienced audit professionals should be intimately involved in the testing and audit conclusions Often, the most significant risk with accounts receivable is proper valuation in accordance with generally accepted accounting principles Depending on: The assumptions of the company’s overall internal control environment The auditor’s assessment of control risk relative to billings and cash receipts, the auditor may tailor standard audit procedures to reduce the risk of failing to detect material misstatement in the financial statements to an appropriately low level The audit of any financial statement area must appropriately address each of the six primary management assertions: • Existence or occurrence For example: accounts receivable are authentic obligations owed to the company at the date of the balance sheet • Completeness For example: accounts receivable include all amounts owed to the company at the date of the balance sheet • Rights and obligations For example: pledged, discounted, or assigned accounts receivable are properly disclosed • Cutoff For example: accounts receivable are recorded in the proper period • Valuation or allocation For example: allowance for doubtful accounts is adequate but not excessive • Accuracy or classification For example: accounts receivable are appropriately classified in the balance sheet, and required disclosures are made The completeness assertion is often the most difficult assertion to test for accounts which is related to revenues In some cases, tests of controls supporting the completeness assertion may be necessary, substantive procedures alone may not be adequate However, for many small businesses, the risk of material unrecorded revenue may be minimal, especially in a circumstance where operations are ... AND RECOMMENDATIONS FOR IMPROVING AUDIT OF ACCOUNT RECEIVABLES IN FINANCIAL AUDIT 30 3.1 Evaluations of Audit of Account Receivables in Financial Statement Audit 30 3.1.1 Strengths... consists of chapters: Chapter 1: The theoretical framework of audit of accounts receivable in financial statement audit Chapter 2: Current Situations of Audit of Account Receivables in Financial Statement. .. THEORETICAL FRAMEWORK OF AUDIT OF ACCOUNT RECEIVABLES IN FINANCIAL STATEMENT AUDIT 1.1 Account Receivables and Its Accounting 1.1.1 The Role of Account Receivables The developing of society leads