So what I want to do is to, sort of, close out this part of the assertions learning material, is just to give you one account and then to show you that there's more than meets the eye to that account, to the layperson. So you see accounts receivable. Remember, accounts receivable is when there had been credit sales and now, instead of giving you cash up front, the auditees companies, customer say, I'll promise to pay you later. So you see in the financial statements, accounts receivable recorded $5 million. The way I like to joke with my students about accounts receivable, is that sometimes they're account's not so receivable. They're just asserted to be receivable. One thing that got a lot of the big box stores in trouble, a number of years ago especially, is that they started having these huge sales, like 6 months no interest, no payments. They would run a credit check on their customers for these huge entertainment systems, or computer systems, and the credit checked out okay on a large number of customers at that point in time, but the issue is that they were not going to have to pay for six months. And the creditworthiness of customers at today is very different than the creditworthiness of the customers at 6 months. So the credit risk models that they were using to grant credit was just based on current credit risk, where the models we now know should have been based on where is this customer likely to be in 3 to 6 months? Unfortunately, when you give a lot of financially illiterate customers, and that's more a larger percentage of the population then we would like, a respite from payments, and saying this is entertainment systems, this is computer systems, they're yours and you can forget about paying it for 6 months, they tend to take on more debt. So 6 months later this is in a case of accounts receivable, became accounts not so receivable over time. So, you worry about the existence of the account. Was there a bonafide customer? For this big box example, yeah. There was not an issue with the existence. These was recorded receivables were largely existing, this is not a case of fictitious receivables, in a widespread way. Completeness, you bet this is not going to be a high inherent risk because they were very eager to record these credit sales. This made their financial performance look very, very good. The valuation one, that is the kicker. Receivables are carried at net realizable value, because you have gross accounts receivable less and allowance for doubtful accounts, and that gives you net accounts receivable. Well this allowance for doubtful accounts was the problem. The problem was this was much too small of a valuation allowance. So, instead of carrying receivables at net realizable value, a lot of these stores were carrying receivables at a puffed-up estimate, overly optimistic estimate of what ultimately would be received. Rights and obligations. This is not such a big deal for this type of big box store credit sales like a Best Buy or Circuit City. Remember, Circuit City? No, you don't. What's one reason you don't remember Circuit City? Yeah, this example, right? And competition like Best Buy. Rights and obligations. This is going to pertain to the following circumstance. A lot of times, if you have receivables on your books, if a company starts getting strapped for cash, they cannot afford to wait for the customers natural payment dates, sometimes they'll sell those receivables, or factor those receivables, to a third party, and those receivables, the rights to those receivables, become a bank's or another third parties rights. So the receivables exists, they might be properly value, they are complete, but the big box company may not have the rights to them anymore. What you want to avoid, of course, is having the receivables on multiple entities at the same time. It's the audit joke is how much of the inventory that is in trains, on the railroad, or on trucks, semi-tractor trailers or interstates that's simultaneously recorded as inventory in two different companies books? Hopefully not much, but my worrying concern is, of course, there's a lot of double booking going on, more than you would like. Presentation and disclosure, that's where receivables are properly presented and requisite disclosures are made. One thing to look at here for accounts receivable. There is a distinction between trade receivables and non trade receivables. Trade receivables are those receivables that arise in the normal course of business, whereas, if you have receivables from employees of your organization, those should not be classified in the same place. So that hopefully, will give you an understanding of the assertions that are implicitly associated with the account balances in the financial statements. We'll move on to another example, of another account, deferred revenue, in another lesson.
