Question 1

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 2

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 3

When sending confirmations during most audits of accounts receivable, the emphasis should be on confirming larger and older accounts.

Accepted Answer

Confirming larger and older accounts carries a higher risk of material misstatement, so auditors prioritize confirming these accounts to obtain sufficient and appropriate audit evidence.

Question 4

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, while negative confirmations might be used for accounts with smaller balances as they are considered lower risk. Positive confirmations require a response indicating whether the recipient agrees or disagrees with the information provided, making them more reliable for high-risk accounts. Negative confirmations request a response only if the recipient disagrees with the information, making them less reliable but more efficient for accounts considered to be of lower risk.

Question 5

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

Accepted Answer

Confirmations should be sent as close to balance date as possible to ensure that the information received is accurate and reliable. If too much time elapses between the balance date and the confirmation request, there is a greater risk that the customer's financial position may have changed, resulting in inaccurate or incomplete information. Therefore, sending confirmations as close to balance date as possible enhances the reliability of the confirmation process.

Question 6

Confirmations of accounts receivable are useful for evaluating several accounts receivable balance-related audit objectives, including existence, rights, and realisable value.

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Question 7

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

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Question 8

A high acceptable audit risk will permit a higher planned detection risk than if acceptable audit risk were low.

Accepted Answer

If acceptable audit risk is high, it means the auditor is willing to accept a higher risk of issuing an incorrect opinion. This means the auditor can afford to have a higher planned detection risk, which is the risk that material misstatements will not be detected. Conversely, if acceptable audit risk is low, the auditor cannot afford to have a high planned detection risk and must perform more rigorous procedures to reduce the risk of issuing an incorrect opinion.

Question 9

The type of confirmation is a major factor affecting sample size when confirming accounts receivable, with negative confirmations normally requiring a larger sample than positive confirmations.

Accepted Answer

This statement is true. Negative confirmations are less reliable than positive confirmations because non-responses cannot be assumed to be agreement with the account balance, so a larger sample is needed to increase the reliability of the result. Positive confirmations, on the other hand, are assumed to be agreement with the account balance unless the respondent indicates otherwise, so a smaller sample can be used.

Question 10

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

Accepted Answer

Confirmations mailed but not returned by customers are considered as unreliable audit evidence as they do not provide any evidence of the confirmation's accuracy. As a result, auditors may need to follow up with the customers who did not respond to the confirmation or use alternative audit procedures to obtain sufficient and appropriate audit evidence.

Question 11

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

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Question 12

Planned detection risk and planned evidence are directly related; that is, as planned detection risk increases, planned audit evidence for tests of details of balances also increases.

Accepted Answer

As planned detection risk increases, the auditor plans to collect less evidence because they are willing to accept a higher risk that they will not detect material misstatements. Conversely, as planned detection risk decreases, the auditor plans to collect more evidence.

Question 13

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

Accepted Answer

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Question 14

The results of analytical procedures performed while auditing the sales and collection cycle are used to determine the level of planned tolerable misstatement for accounts receivable balance-related audit objectives.

Accepted Answer

Analytical procedures are used to assess the level of risk and determine the planned tolerable misstatement for various financial statement assertions. In the sales and collection cycle, these procedures are used to assess the reasonableness of sales, allowances, returns, and uncollectible accounts. Any significant deviations from the expected results can indicate potential material misstatement, which may require further investigation or adjustment. Ultimately, the level of planned tolerable misstatement will depend on the auditor's assessment of materiality, inherent risk, control risk, and the results of the audit procedures performed.

Question 15

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

Accepted Answer

Negative confirmations are less reliable because they only confirm that the recipient does not dispute the information, but not that they actually agree with it. This means there is a higher risk of potential misstatements or fraud going undetected. However, they are generally less expensive than positive confirmations because they require less effort from the recipient to respond.

Question 16

When a customer disagrees with the amount shown on an accounts receivable confirmation, the auditor should not ask the client to reconcile the difference.

Accepted Answer

The auditor should investigate the reason for the disagreement by asking the client to reconcile the difference, as this could indicate an error in the financial records or potential fraud.

Question 17

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?

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Question 18

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

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Question 19

Match five of the 11 terms (a-k)with the five 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

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Question 20

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.

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