Auditing Accounts Receivable (AR)
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Accounts receivable represents amounts customers owe a company, which makes it a critical asset to audit — and a well-tested topic on the AUD section of the CPA exam. Three procedures do most of the work: receivables confirmation, aging analysis, and bad debt assessment.
What is receivables confirmation?
Receivables confirmation verifies AR balances by directly contacting the debtor. It's a primary substantive procedure for obtaining audit evidence on accuracy and existence.
- Positive confirmation — requires a response either way, whether the debtor agrees or disagrees with the balance
- Negative confirmation — requires a response only if the debtor disagrees
Example: You're auditing a software company with a major client showing a $50,000 outstanding balance. You send a positive confirmation, and the client confirms the amount — strong evidence supporting the recorded balance. A discrepancy would instead be a red flag requiring further investigation.
What is aging analysis?
Aging analysis breaks AR down by how long each balance has been outstanding. The older a receivable, the less likely it is to be collected, which makes this procedure central to assessing valuation and estimating the allowance for doubtful accounts.
Example: At the same software company, an aging analysis shows $20,000 of AR is over 90 days old, compared to a typical $5,000 in prior years. That jump might mean the allowance for doubtful accounts needs to be reassessed — and could affect the audit opinion.
What is bad debt assessment?
Bad debt assessment evaluates whether the client has made adequate provision for uncollectible accounts, by testing the allowance for doubtful accounts — the contra-asset account that reduces AR to its net realizable value.
Example: You review the software company's bad debt estimation method and find it's historically been accurate. But given this year's unusual aging, you discuss the allowance with management, and they increase it from $8,000 to $15,000.
Each procedure answers a different question about AR. Confirmation asks "does this balance actually exist and match?" Aging analysis asks "how likely is this to actually get collected?" Bad debt assessment asks "is the allowance big enough to cover it?"
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 90 on AUD. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.