Question 1

An auditor is concerned that accounts receivable may be understated resulting from sales to customers that have been omitted from both the sales journal and the accounts receivable master file. Describe the procedure(s) the auditor should perform in these circumstances.

Accepted Answer

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Question 2

The following audit procedure tests primarily which balance- related audit objective for accounts receivable: Confirm accounts receivable, using positive confirmations.
A) Existence
B) Completeness
C) Classification
D) All of the above

Accepted Answer

Confirming accounts receivable using positive confirmations tests the existence objective, which ensures that the accounts receivable actually exists and is valid. It does not test completeness or classification.

Question 3

Describe the types of 'unusual balances' auditors are looking for when they review the accounts receivable master file.

Accepted Answer

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Question 4

Favourable results from analytical procedures reduce the extent to which the auditor needs to test details of balances.

Accepted Answer

Analytical procedures involve analyzing financial information to identify relationships and patterns that are unusual or unexpected. If the results of these procedures are favorable, meaning they do not indicate any significant issues or risks, then the auditor may be able to rely on them and reduce the amount of testing they need to do on specific account balances. However, if the results are unfavorable, the auditor will need to perform additional testing to ensure there are no material misstatements in the financial statements.

Question 5

Describe how the auditor tests the rights objective for accounts receivable.

Accepted Answer

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Question 6

Negative confirmations are less expensive and less reliable than positive confirmations.

Accepted Answer

Negative confirmations only require a response if the recipient has a disagreement or exception, which means there is a higher risk of undetected misstatements or fraud. Positive confirmations, on the other hand, require a response from all recipients which makes them more reliable but also more expensive.

Question 7

For maximum reliability, accounts receivable confirmations should be sent as close to balance date as possible.

Accepted Answer

Sending accounts receivable confirmations closer to the balance date increases the likelihood that the information is accurate and up-to-date, resulting in greater reliability of the confirmation.

Question 8

Cutoff misstatements exist when subsequent period transactions are recorded in the current period.

Accepted Answer

Cutoff misstatements occur when transactions from a subsequent period are recorded in the current period. This can happen when transactions that occur just before or after the end of the reporting period are recorded in the wrong period.

Question 9

It is common to use a combination of positive and negative confirmations by sending the latter to accounts with large balances and the former to those with small balances.

Accepted Answer

It is common to use positive confirmations for accounts with large balances due to their higher risk, and negative confirmations for accounts with small balances, as they are considered lower risk.

Question 10

Tests of details of balances focus on testing the year- end balances of balance sheet accounts.

Accepted Answer

Tests of details of balances specifically target the year-end balances of balance sheet accounts to ensure that they are fairly stated in the financial statements. As such, this statement is true.

Question 11

If customers use voucher systems, they can confirm balance information but not individual invoices.

Accepted Answer

Voucher systems typically allow customers to confirm both balance information and details of individual invoices, as they are designed to provide comprehensive transaction records.

Question 12

Inherent risk for accounts receivable is normally assessed at the objective level, rather than at the account level.

Accepted Answer

Inherent risk is typically assessed at the objective level, taking into account factors such as the nature of the business, industry trends, and economic conditions that could affect accounts receivable as a whole. However, inherent risk can also be assessed at the account level if there are specific risks or issues related to individual accounts receivable.

Question 13

State the eight specific balance- related audit objectives as applied to accounts receivable.

Accepted Answer

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Question 14

Assuming the client's internal controls are adequate, describe how the auditor can verify proper cutoff of sales transactions.

Accepted Answer

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Question 15

Match five of the terms (a- k) with the descriptions provided below (1- 5):
a. accounts receivable
b. balance- related audit objectives
c. alternative procedures
d. blank confirmation form
e. cutoff misstatements
f. evidence planning worksheet
g. negative confirmation
h. positive confirmation
i. realisable value of accounts receivable
j. timing difference in an accounts receivable confirmation
k. invoice confirmation.
1. The follow- up of a positive confirmation not returned by the debtor with the use of documentation evidence to determine whether the recorded receivable exists and is collectible.
2. A letter, addressed to the debtor, requesting that the recipient indicate directly on the letter whether the stated account balance is correct or incorrect and, if incorrect, by what amount.
3. Misstatements that take place as a result of current period transactions being recorded in a subsequent period, or subsequent period transactions being recorded in the current period.
4. A form used to help the auditor decide whether planned detection risk for tests of details of balances should be low, medium or high for each balance- related audit objective.
5. A letter, addressed to the debtor, requesting a response only if the recipient disagrees with the amount of the stated account balance.

Accepted Answer

The answer of Match five of the terms (a- k)...

Question 16

In the audit of accounts receivable, list the factors that affect the planned detection risk for tests of details of balances.

Accepted Answer

The answer of In the audit of accounts receivable, list...

Question 17

Sales returns should be recorded in the period in which the return occurs.

Accepted Answer

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Question 18

If you were to perform the following audit procedure-review accounts receivable trial balance for large and unusual receivables-what balance- related audit objective would this relate to?

Accepted Answer

The answer of If you were to perform the following...

Question 19

It is appropriate to regard confirmations mailed but not returned by customers as significant audit evidence.

Accepted Answer

Confirmations that are mailed but not returned by customers do not provide reliable audit evidence as it cannot be confirmed whether the confirmation was actually received by the customer or ignored or lost in transit. Therefore, auditors should follow up with these customers and try other independent audit procedures to corroborate the amount or transaction in question.

Question 20

Explain whether it is equally as important to test the cutoff for sales and cash receipts.

Accepted Answer

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Quiz 13: Completing Tests in the Sales and Collection Cycle: Accounts Receivable