A/R

Question 1

Bills of Lading

Answer 1

legal doc between shipper and carrier detailing the type, quantity and destination of the good being carried

• ensures that shipments to the customers were invoiced
• receipt of shipment when reaches destination
• must be signed and be carried with the shipment

Question 2

If no response on second confirmation request, auditor performs alternate procedures. What are they?

Answer 2

1) subsequent cash receipts: trace accounts subsequent to the date of the confirmation to the cash receipt journal and bank statement (suggests if balances are valid and are subsequently collected)
2) vouch (confirm, inspect) to the underlying documents (last resort if the account has not been collected)-examine docs (purchase order, sales invoice, shipping docs) which support the validity (occurrence) of the transactions in the account balance

Question 3

what assertion affects A/R?

Answer 3

existence/occurrence

Question 4

Negative confirmations are used when?

Answer 4

• individual customer disagrees with the stated balance
• non-response
• request is thrown away wihtout verifying balance
• small balances under effective internal control

4 conditions
1) RMM (inherent risk and control risk are low)

2) a large number of small balances is involved
3) a very low exception rate is expected
4) the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration.

Question 5

If there is a difference between account balance and confirmation replies, what should the auditor consider in defining the sample unit?

Answer 5

individual invoices

*auditor should consider what respondents will most likely easily confirm

Question 6

What gives the valuation assertion in A/R? (4 things)

Answer 6

reasonableness of “allowance for uncollectibles” and “allowance for sales of returns”

1) fairness of dollar valuation
2) review the aged trial balance of A/R (inquire about large items and estimate percentage of uncollectables within each category of age)
3) review receivers after-year end for sales returns and consider prior-years for view of current economic conditions
4) review adjusting journal entries (write offs) for appropriate authorization

Question 7

if no response on a positive confirmation request then?

Answer 7

Ask the client to contact the customers to request that the confirmations be returned.

Question 8

How should an auditor respond to risk assessment?

Answer 8

1) overall response
- ask for more experienced staff

2) response at R/A level

Question 9

What gives the completion assertion in A/R?

Answer 9

-perform cut-off tests of sales (compare shipments at year-end and a few after with appropriate invoices to determine if sales were recorded in the proper period)

• performing invoice with each shipment document
• cutoff validates two assertions (completeness+existence/occurrence)

Question 10

The confirmation of A/R gives primary evidence of what?

Answer 10

Rights/Obligations

-direct response from third parties provide proof that A/R are valid and are properly owed to entity

Question 11

Presentation and Disclosure in general is used for what?

Answer 11

determines whether components on the financials are appropriate described and disclosed

Question 12

In A/R there are 4 assertions…

Answer 12

1) existence/occurrence
2) valuation
3) completeness
4) rights/obligation

Question 13

A/R Turnover

Answer 13

Net Credit Sales/AR Balance

• obsolete inventory
• concerns valuation/allocation

if turnover is low then it results from low sales or high AR balance; normally occurs due to fictitious sales

Question 14

what happens when an auditor decides to confirm accounts receivable balances rather than individual invoices?

Answer 14

Client-prepared statements of account that show the details of the account balances.