Confirmations of receivables at an interim date When internal controls are strong, the auditor may decide to confirm receivables before year end. Roll-forward procedures are then used to obtain adequate evidence for the roll-forward period. Discuss why

Question

the auditor would want to confirm receivables before balance sheet date, the risks involved, and at least three of the roll-forward procedures that the auditor performs to gain assurance on the roll-forward period.

Answer 1

The auditor usually prefers to perform as many audit procedures as possible before balance sheet date in order to better spread out the work since many clients have a December 31 year-end. However, collecting evidence before year-end increases the risk that the account may be materially misstated since the evidence is collected before the completion of the entire year. As a result the auditor has to perform a cost/benefit analysis as to whether it is beneficial to gather evidence at the interim. If there are good controls and a high degree of reliability can be achieved using roll-forward procedures for the roll-forward period then performing confirmations at the interim makes sense, e.g., with property, plant and equipment accounts. Depending upon their materiality and risk of misstatement, confirming receivables at the interim may or may not be a useful procedure since there may be no reduction of work after the balance sheet date. The auditor is responsible to gather sufficient, competent evidence for the entire fiscal year, not just up to the roll forward period.
If the auditor decides that it is useful to confirm receivables at the interim, the evidence must be collect to extent that conclusion to the year-end. Common roll forward procedures to do this are:
* Compare individual balances at the interim with the year-end and confirm any that have substantially increased.
* Compare monthly sales, collection, sales discounts, and sales returns and allowances during the roll forward period with those for prior months and prior years to see if they appear out of line, in which case corroborative evidence of management's explanation has to be collected.
* Reconcile receivable subsidiary records to the general ledger at both the interim and the year-end dates.
* Test the cut-off of sales, cash collections, and credit memos for returns and allowances at year-end.
* Scan journals to identify receivables postings from unusual sources and investigate unusual items.
* Compute the number of days' sales in receivables at both the confirmation date and year-end, and compare these data with each other and with data from prior periods.
* Compute the gross profit percentage during the roll-forward period, and compare that to the percentage for the year and for prior periods.