Sarbanes-Oxley Act (SOX) of 2002

As the junior auditor for a regional audit/assurance services firm, you have been tasked with auditing the Accounts Receivable process for a mid-size retail company. The Accounts Receivable process covers payment processing and monitoring of outstanding receivable balances.

1. Please read the attached Narrative - Accounts Receivable.

2. The Lead Auditor has asked you to conduct re-performance testing which requires you to manually execute the control, such as re-performing a calculation that a system automatically calculates. Below are the following transactions that occurred during the audit period:

Date: Transactions:

March 14, 2019 _Received 75% of the $20,000 balance owed by Webb Co., a bankrupt business. Wrote off remainder as uncollectible.

April 20, 2019 -Reinstated the account of Zorn Co., which had been written off in the preceding year as uncollectible. Received $5,225 cash as full payment of

Zorn's account.

May 27, 2019 -Wrote off the $2,500 balance owed by Schmich Inc., which had no assets.

June 30, 2019 -Based on an analysis of Accounts Receivable, it is determined that $11,500 will become uncollectible. The balance in Allowance for Doubtful Accounts on December 31 prior to adjustment is $200.

Prepare T-Accounts for the transactions.

Determine balance in Allowance for Doubtful Accounts after adjustments.

Determine the Net Realizable Value of Accounts Receivable if the balance of the Accounts Receivable is $62,000.

Redo the entry for 06/30 if the percent of sales method had been used to estimate uncollectible accounts expense at the rate of of 1% of net sales of $2,000,000.

3. Based on the attached Narrative - Accounts Receivable please answer the following questions:

A. What are management's objectives for Accounts Receivable?

B. What are the inherent risks for Accounts Receivable?

C. What are the key controls within the Accounts Receivable process?

4. Prepare a flow chart for the Property/Ownership Setup & Maintenance - identify the key processes, risks and controls for Accounts Receivable process. **Flowchart can be handwritten or prepared using Word, Excel, PowerPoint and/or Visio**

Accounts Receivable Narrative

The Accounts Receivable process covers the following sub-processes:

Payment Processing

Monitoring Outstanding Receivables

o Annual Process to Update Methodology

o Monthly Process to Post Allowance for Doubtful Account Entries

Payment Processing

Customers send payments to bank lockboxes directly. Any payments sent directly to the Company are forwarded to the lockbox for processing. The bank enters the receipts in batches and forwards copies of all checks to the A/R department daily. All the details are received prior to closing the A/R for the month, so all cash is posted in the month received.

On a daily basis, the A/R Clerk posts the checks to a temporary holding program in SAP that allows the A/R Manager to review the accuracy of the postings made by the A/R Clerk. Once the A/R Manager approves the payment postings, the SAP system will run nightly at 11 p.m. to batch apply the payments to A/R records, and record the amounts on the general ledger.

On a monthly basis, the A/R Clerk prepares, and the A/R Manager reviews, a reconciliation of the lockbox cash account. Refer to the Cash/Treasury process narrative for the full bank reconciliation process.

Monitoring Outstanding Receivables

Annual Process to Update Methodology The Allowance for Doubtful Accounts (ADA) is calculated following the guidelines set forth in the Corporate Credit and Collections Policy. The policy states that in the period of sale, the customer that eventually will not pay, the amount that will not be paid and the period in which the customer's account will become uncollectible cannot be determined. Therefore, the uncollectible accounts expense must be estimated at the end of each accounting period. Determining the Amount of Uncollectible Receivables and Bad Debt Expense can be determined by the Percent of Sales Method - uses credit sales for the period to estimate bad debt expense or the Percent of Receivables method - analyses the balance in Accounts Receivable to estimate the balance in the Allowance for Uncollectible Accounts at the end of the period.

On an annual basis, the Company updates their methodology for the ADA. This typically occurs in January each year to allow for a timely change in any methodology to be applied to all accounting periods through the calendar year.

The A/R Clerk prepares the allowance for doubtful accounts package for review by the A/R manager. The methodology is based primarily on past historical information for company sales and write-off history. The base estimate for the initial bad debt allowance percentage is calculated by dividing the sum of historical write-offs by the sum of the total credit sales for the historical three year period.

The A/R balances at the beginning of the year are reviewed and the estimated ADA percentages for aging buckets are updated for the current year for use in monthly entries to adjust the ADA account balance. The A/R department has tracked historical figures and the following ADA estimates are used as a general starting point for receivables aging:

Receivable Age (in days): 1-30 31-60 61-90 >90

Estimated ADA %: 2% 10% 50% 75%

After the A/R Clerk prepares the ADA package, the A/R Manager reviews the 3-year historical data and makes adjustments to the aging buckets to accommodate for other expected changes in the collectability of the receivables for the current year.

The A/R Manager updates the draft ADA methodology documentation and provides it to the Corporate Controller for review and approval. Only upon final approval by the Corporate Controller is the ADA percentage used in the monthly accounting process to estimate allowance for doubtful account entries in the SAP system.

Monthly Process to Post Allowance for Doubtful Account Entries

On a monthly basis, an Accounting Analyst in the Finance Department prepares a reconciliation of the A/R sub-ledger to the general ledger. The Accounting Manager reviews and approves the reconciliation to ensure that there are no differences, or that any adjusting items are properly documented and understood. This reconciliation is maintained in the Finance Department and the package must have both preparer and reviewer sign-offs to validate the reconciliation is final. Upon completion of the reconciliation, the Finance Department notifies the A/R Department that the balances can be used to adjust the allowance for doubtful accounts.

Upon receiving notice from the Finance Department, the A/R clerk prints the A/R aging report to begin preparing the monthly adjustments to the ADA estimate. The SAP system ages the accounts receivable based on the parameters established within the system and this information is used to generate the A/R aging report systematically. The A/R Clerk prepares the monthly ADA spreadsheet that takes the A/R aging information and applies the approved ADA percentages based on the aging buckets. The ADA estimates are then adjusted based on the current aging information of the A/R balances. The A/R clerk uses the ADA spreadsheet to propose a journal entry to adjust the ADA account balance and the ADA Expense. The A/R Manager reviews the ADA spreadsheet and draft journal entries. Upon receiving approval from the A/R Manager, the A/R Clerk records the journal entries in the SAP system and the A/R Manager approves the entries.