A risk of material misstatement in accounts receivable associated with the allocation balance-related audit objective is that "long-term service revenue is recorded as current revenue or in the wrong period,overstating revenue and accounts receivable." Which of the following tests of detail of balances would respond to this risk?
A)Read customer contracts and audit the criteria used to allocate revenue to components of the sales contract.
B)Check cash received after the year end and trace to accounts receivable master file.
C)Read the notes to the financial statements and compare to audited financial information.
D)Enquire with management about the process used to make sure that revenue is recorded in the correct period.

Question

Quizplus · Accepted Answer

This test directly addresses the risk of long-term service revenue being recorded as current revenue or in the wrong period by examining the criteria used to allocate revenue to components of the sales contract. Choice B relates to the existence/occurrence balance-related audit objective, Choice C relates to the presentation and disclosure audit objective, and Choice D relates to the control-related audit objective.

A Risk of Material Misstatement in Accounts Receivable Associated with the Allocation