Chapter 14: Testing Accounts Receivable Flashcards
How is the existence assertion tested with accounts receivable?
states all AR recorded actually exist, send out confirmations
What are AR confirmations?
forms auditors send to client’s customers asking customer to verify whether what the client is reporting that the customer owed the client at year-end is valid
What are the types of confirmations?
Positive and negative confirmations
What are positive confirmations?
ask the customer to respond to confirmation in all cases
What are negative confirmations?
ask customer to respond only if reported amount is incorrect
Which type of confirmation provides more reliable evidence?
positive confirmations because unreturned negative confirmations do not necessarily indicate customer agreement
Why do auditors use negative confirmations?
cheaper and should only be used when auditor has confidence that recipients will actually get confirmation and respond if there are errors
Why do auditors use positive confirmations?
provides reliable evidence but are fairly expensive because once the auditor decides to use a positive confirmation, must verify account in question
What are the types of positive confirmation forms?
Filled in or blank form
What are filled in confirmations?
state that audited company’s records indicate customer owed certain amount and asks if this is correct
What are blank form confirmations?
ask recipient to fill in amount records indicate they owe
Which type of positive confirmation provides more reliable evidence?
blank form confirmations because when customers receive filled in confirmations they could just indicate amount agrees without checking records
What do auditors need to do after determining type of confirmation to send out?
determine their sample size
What do auditors consider when determining sample size?
1) Size of balance, 2) Set level of audit risk, 3) Tolerable misstatement, 4) Assessed level of RMM, 5) Extent of evidence from other audit procedures, 6) Sampling method
What do auditors do after determining the necessary sample size?
decide which customers to send the confirmations to
What do auditors do after picking their sample?
create the confirmations they will send out
What should auditors do when receiving completed confirmations?
check the appropriate confirmation listed on the confirmation control sheet
What if there is no response to the confirmations?
auditors can perform alternative procedures to test the existence assertion for that particular item
What do auditors do after receiving returned confirmations and performing alternative procedures for unreturned confirmations?
auditors need to analyze audit evidence from these procedures
What do auditors do after identifying all misstatements?
sum the misstatements and then estimate the total amount of misstatement in the population based on the total amount of misstatement in the sample
How do auditor’s conclude if a balance is materially misstated?
compare estimated misstatement in the population against the set amount of tolerable misstatement
When is a balance materially misstated?
if estimated misstatement exceeds tolerable misstatement and suggest an audit adjustment
How is the completeness assertion tested for accounts receivable?
indicates that all accounts receivable that exist have been recorded, use cut-off testing
What is cut-off testing?
auditors examine a sample of sales transactions and supporting source documents for a few days right before and right after year end to make sure they are recorded in the proper accounting period
How is the valuation assertion tested for AR?
states that all recorded AR are recorded at appropriate value in accordance with GAAP, assess the sufficiency of the allowance for doubtful accounts
What is the primary factor that affects the value of AR?
collectibility
How is the sufficiency of allowance for doubtful accounts tested?
look at the aged AR report and test whether individual balances are included in proper buckets
How is the rights and obligations assertion tested?
perform client inquiries and review minutes from meetings of the board of directors, examine loan documents, and examine bank confirmations to assess whether company has either pledged receivables as collateral or factored them
