Question 1

It may NOT be necessary for an auditor to confirm accounts receivable when:

Accepted Answer

All of the above options can be reasons for the auditor to not confirm accounts receivable. If the accounts receivable balance is immaterial or the auditor considers confirmations to be ineffective, then confirmation may not be necessary. Additionally, if there is a low level of inherent and control risk and sufficient substantive evidence can be obtained through other means, confirmation may not be necessary.

Question 2

When positive confirmations are used, ASA 505 requires follow-up procedures for confirmations not returned by the customer.In such a situation, which of the following would NOT be classified as an alternative procedure?

Accepted Answer

Sending a second confirmation request is not considered an alternative procedure for non-returned confirmations under ASA 505. Alternative procedures typically involve examining other evidence to validate the account balance, such as subsequent cash receipts, sales documentation, or shipping documents.

Question 3

When no reply to a positive confirmation is received, the auditor:

Accepted Answer

When no reply to a positive confirmation is received, the auditor should examine subsequent cash receipts and duplicate sales invoices to obtain evidence about the existence of the recorded sales.

Question 4

A customer mails and records a cheque to a client for payment of an unpaid account on December 30.The client receives and records the amount on January 2.The records of the two organisations will be different on December 31.

Accepted Answer

This is a timing difference because the transaction was recorded on different dates by the two organizations. If the transaction had been recorded on the same date by both organizations, there would have been no difference in their records. A cutoff misstatement occurs when transactions are recorded in the wrong period, but in this case, the transaction was recorded in the correct period by both organizations, just on different dates.

Question 5

Which one of the following circumstances would indicate that negative confirmations should NOT be used on an engagement?

Accepted Answer

Negative confirmations are less effective when a significant portion of the total accounts receivable is represented by a small number of accounts with large balances because the non-response to a negative confirmation does not provide explicit evidence that the customer agrees with the stated account balance. In such cases, positive confirmations, where a response is required to confirm the balance, are more appropriate to ensure accuracy and validity.

Question 6

The auditor should evaluate the qualitative nature of misstatements found in a sample of debtors' confirmations:

Accepted Answer

The auditor should evaluate the qualitative nature of misstatements found in a sample of debtors' confirmations regardless of the dollar amount. This is because even small misstatements may indicate a material weakness in the company's internal controls or fraud.

Question 7

The use of the positive (as opposed to the negative)form of receivables confirmation is preferred when:

Accepted Answer

The answer of The use of the positive (as opposed...

Question 8

________ to positive confirmations do NOT provide audit evidence.

Accepted Answer

Non-responses do not provide any audit evidence as no response is received from the client. Responses and follow-ups can provide audit evidence if they are reliable and relevant.

Question 9

The following audit procedure tests primarily which balance-related audit objective for accounts receivable: confirm accounts receivable, using positive confirmations.

Accepted Answer

Confirming accounts receivable using positive confirmations primarily tests the existence objective, as it verifies whether the balances recorded in the accounts receivable ledger are supported by the existence of corresponding customer receivables. However, this procedure may also provide some evidence for completeness since it helps to ensure that all significant receivables are included in the financial statements. It does not directly address the classification objective.

Question 10

After items to be confirmed have been selected, the auditor must maintain control of the confirmations until the:

Accepted Answer

The auditor must maintain control of the confirmations until the responses are received by the auditor from the customer to ensure the integrity and reliability of the confirmation process.

Question 11

When positive confirmations have been used, it is normally desirable to account for unconfirmed balances with alternative procedures:

Accepted Answer

The answer of When positive confirmations have been used, it...

Question 12

What is the advantage of using the negative form of confirmations?

Accepted Answer

Using the negative form of confirmations allows for larger sample sizes to be used without increasing costs. This is because follow-up procedures are only necessary for those who respond with a discrepancy, whereas with positive confirmations, follow-up procedures are required for every respondent regardless.

Question 13

When the confirmation requests are returned by the customer, in many cases, they are caused by ________ between the client's and the customer's records.

Accepted Answer

Confirmation requests are often sent out to ensure that there are no discrepancies or differences between the client's and the customer's records. These differences could be due to timing differences, such as transactions occurring at different times, which can result in discrepancies in the records. Other factors such as miscommunication or valuation disputes may contribute to discrepancies, but timing differences are a common cause for confirmation requests.

Question 14

Each auditee misstatement of accounts receivable must be analysed to determine whether it:

Accepted Answer

The answer of Each auditee misstatement of accounts receivable must...

Question 15

A positive confirmation is more reliable evidence than a negative confirmation because:

Accepted Answer

A positive confirmation, where the debtor confirms the stated balance, provides direct evidence of the correctness of the account balance, while a negative confirmation only provides indirect evidence since it is possible that the debtor did not respond due to errors, misunderstandings or fraud. However, if no response is received to a positive confirmation, the auditor can perform follow-up procedures such as obtaining additional confirmations, performing alternative procedures or conducting discussions with management, which enhances the reliability of the evidence obtained.

Question 16

The following audit procedure tests primarily which balance-related audit objective for accounts receivable: inquire of management whether there are any related-party loans.

Accepted Answer

The audit procedure of inquiring about related-party loans is primarily related to the balance-related audit objective of classification, which aims to ensure that accounts receivable are properly classified in the financial statements. It is important to distinguish between trade and non-trade receivables and related-party transactions, as they can have an impact on the presentation and disclosure of the financial statements. This audit procedure is not directly related to the existence or completeness of receivables, although it may indirectly provide some evidence for these objectives. Therefore, the correct answer is C) classification.

Question 17

The most reliable evidence from confirmations is obtained when they are sent:

Accepted Answer

Confirmations should be sent as close to the balance sheet date as possible to obtain the most reliable evidence. This reduces the possibility of subsequent events affecting the accuracy of the balance. Option A and C may lead to a sampling bias, and Option B may not allow sufficient time for alternate procedures if responses are not received in a timely manner.

Question 18

The following audit procedure tests primarily which balance-related audit objective for accounts receivable: review accounts receivable trial balance for large and unusual receivables.

Accepted Answer

Reviewing the accounts receivable trial balance for large and unusual receivables primarily tests the existence balance-related audit objective, which seeks to confirm that the recorded accounts receivable actually exist and are owed to the company. It would not directly test completeness or classification objectives.

Question 19

Which of the following is NOT a factor affecting sample size for confirming accounts receivable?

Accepted Answer

Assessed detection risk is not a direct factor in determining the sample size for confirming accounts receivable. The sample size is more directly influenced by the type of confirmation, the tolerable misstatement, and the control risk. Detection risk pertains to the risk that the auditor will not detect a material misstatement, which is managed through the overall audit approach rather than specifically through the sample size for accounts receivable confirmation.

Question 20

Returns of positive confirmation requests for accounts receivable were very poor.As an alternative procedure, the auditor decided to check subsequent collections.The auditor had satisfied himself that the client satisfactorily listed the customer name next to each cheque listed on the deposit slip; hence, he decided that for each customer from whom a confirmation was not received, he would add all amounts shown for that customer on each validated deposit slip for the two months following the balance sheet date.The major fallacy in the auditor's procedure is that:

Accepted Answer

The major fallacy in the auditor's procedure is that by looking only at the deposit slip, the auditor would not know if the payment was for the receivable at the balance sheet date or for a subsequent transaction. This means that the auditor cannot reliably determine if the outstanding receivable was collected or not. Additionally, the auditor's alternative procedure of checking subsequent collections is not an accepted alternative auditing procedure for confirmation of accounts receivable. Therefore, choice B is also incorrect. The fact that the deposit slip would not be received directly by the auditor as a confirmation would be (choice A) and that a customer may not have made a payment during the two-month period (choice C) may be potential issues, but they are not the major fallacy in the auditor's procedure.

Quiz 13: Completing tests in the sales and collection cycle: Accounts receivable