The auditor of ABC Ltd.has concluded that there are significant risks of misstatement of revenue at the company with potential overstatement of revenue.Which of the following audit tests should the auditor conduct to address this significant risk?
A)control tests of authorization to ensure that credit limits for sales are all approved by the sales manager
B)analytical review of sales comparing sales trends over the last five years by division and to the industry
C)examination of sales after the year end to quantify potential cutoff errors (income from the subsequent period included in the current year)
D)risk assessment procedures looking carefully at inherent risks associated with the handling of cash in the sales cycle

Question

Quizplus · Accepted Answer

The best choice to address the significant risk of misstatement of revenue is to conduct examination of sales after the year-end to quantify potential cutoff errors as income from the subsequent period included in the current year may overstate revenue. Control tests of authorization (A) and risk assessment procedures (D) address different risks and may be performed in conjunction with the examination of sales. Analytical review of sales trends (B) may provide useful information but may not necessarily identify potential misstatement of revenue.

The Auditor of ABC Ltd