Accounts Receivable

Question 1

What is meant by the term lapping related to accounts receivable?

Answer 1

An attempt to cover up a theft of receipts, where a clerk might apply a different customer’s payment to a prior customer’s account (whose payment was stolen) to conceal the theft.

Question 2

Identify several audit procedures that address the existence assertion for accounts receivable.

Answer 2

1. )Verify subsidiary ledger agrees with the general ledger control account
2. )Confirm individually material accounts and selected others.
3. )Investigate exceptions (disputed balances) from confirmations
4. )Complete alternate procedures for nonresponses to positive confirmations.

Question 3

Identify 2 audit procedures that address the rights and obligations assertion for accounts receivable.

Answer 3

1. )Inquire about receivables pledged as collateral.

2. )Read the debt agreements for any discussion of collateral.

Question 4

Describe how the auditor performs the “cutoff test” for sales.

Answer 4

Examine the last few transactions before year-end and the first few after year-end. Agree the entries on the sales journal to the shipping documents (existence); and agree the shipping documents to the sales journal (completeness).

Question 5

Identify several audit procedures that address the valuation assertion for accounts receivable.

Answer 5

1. )Review the aged trial balance (and test its accuracy).
2. )Inquire about individually large, delinquent items.
3. )Estimate uncollectible accounts based on time outstanding (that is, based on each category of age).
4. )Review receiving documents after year-end for sales returns.

Question 6

What is the main audit procedure that addresses the completeness assertion for accounts receivable?

Answer 6

Perform cutoff test of sales to verify that sales transactions are recorded in the proper period. Sales transactions may be recorded prematurely, violating the existence assertion, or recorded belatedly, which violates the completeness assertion.