Question

Suppose that you are an auditor at a large accounting firm. On your audit assignment at a global company client, your manager asks you to think of a procedure to test the client company’s claim that they have $100 million in accounts receivable and only $20 million in accounts payable. The client company then says that “they are in the best financial condition in the industry.”
a) Discuss which audit objectives the procedure is supposed to fulfill
b) Suppose your boss drops by your office to ask you about what procedure you would recommend she conduct to test these assertions. What would you say, and why?

Answer 1

Investors should interpret accounts receivable information on a company's balance sheet as money that the company has a reasonable assurance of being paid by its customers at a defined date in the future. However, there is no firm guarantee that a company will be paid the money it is owed.

On a company's balance sheet, the accounts receivable line represents money it is owed by its customers for goods or services rendered. Suppose XYZ Company agrees to sell $500,000 worth of its product to customer ABC on net 90 terms, meaning the customer has 90 days to pay. At the point of sale, the accounting is as follows: XYZ Company records the $500,000 as a receivable by debiting its accounts receivable account. Because the money is classified as revenue to the company the moment the sale is made, rather than when the cash is actually received, a $500,000 credit is also made to the revenue account on the balance sheet, which balances the entry. When the customer pays, hopefully within the 90 days allotted, XYZ Company reclassifies the $500,000 as cash on its balance sheet by debiting the cash account and crediting the accounts receivable account.

• Accounts receivables are the expected cash to be received in the future for the sales that are made on a credit basis. Accounts payable is the cash that is to be paid to the creditors for the purchase of raw material or services
• Accounts Receivable is the amount that the customers of the company owe to it. On the other hand, Accounts Payable is the amount that the company owes to the suppliers.
• Both of them are a part of the balance sheet but accounts receivable falls under the current assets section while accounts payable falls under the liabilities section under current liabilities
• Accounts receivables are the amount that is owed to the company while accounts payable is the amount owed by the company
• Accounts receivables are created because of the selling of goods and services while accounts payables are created because of purchasing material on credit
• Receivables can be offset with an allowance of doubtful debts while payables have no offset
• In the case of Accounts receivables Money to be collected while in the case of Accounts payables money is to be paid
• Accounts receivables lead to an increase in cash flow while accounts payable leads to a decrease in cash flow
• Accounts receivables are the result of credit sales while accounts payable is the result of credit purchases
• Components of Accounts receivables are debtors and bills receivables while a component of accounts payable is billed payable.
• Accounts receivables are calculated as total sales minus returns and all the allowances and the discount given to the customers. The average Accounts receivables are calculated as beginning balance plus ending balance divided by two. Accounts payable is simply the total cost of purchases.
• For Accounts receivables, the accountability lies on the debtors while for account payables the accountability lies on the business

Accounts receivables, like cash, are considered assets. An asset is something of value that a company owns or controls. Accounts receivables are considered valuable because they represent money that is contractually owed to a company by its customers. Ideally, when a company has high levels of receivables, it signifies that it will be flush with cash at a defined date in the future.

Classified as a current asset on the company's balance sheet, or statement of financial position, accounts receivable is highly important since it represents the primary source of a company's cash inflow. As a current asset, it is generally anticipated that the accounts included in the balance will be converted into cash within less than 12 months. To understand the impact made to the balance sheet when a customer debt is collected, it is important to understand the initial sale.