Chapter 14: Testing Accounts Receivable

Question 1

How is the existence assertion tested with accounts receivable?

Answer 1

states all AR recorded actually exist, send out confirmations

Question 2

What are AR confirmations?

Answer 2

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

Question 3

What are the types of confirmations?

Answer 3

Positive and negative confirmations

Question 4

What are positive confirmations?

Answer 4

ask the customer to respond to confirmation in all cases

Question 5

What are negative confirmations?

Answer 5

ask customer to respond only if reported amount is incorrect

Question 6

Which type of confirmation provides more reliable evidence?

Answer 6

positive confirmations because unreturned negative confirmations do not necessarily indicate customer agreement

Question 7

Why do auditors use negative confirmations?

Answer 7

cheaper and should only be used when auditor has confidence that recipients will actually get confirmation and respond if there are errors

Question 8

Why do auditors use positive confirmations?

Answer 8

provides reliable evidence but are fairly expensive because once the auditor decides to use a positive confirmation, must verify account in question

Question 9

What are the types of positive confirmation forms?

Answer 9

Filled in or blank form

Question 10

What are filled in confirmations?

Answer 10

state that audited company’s records indicate customer owed certain amount and asks if this is correct

Question 11

What are blank form confirmations?

Answer 11

ask recipient to fill in amount records indicate they owe

Question 12

Which type of positive confirmation provides more reliable evidence?

Answer 12

blank form confirmations because when customers receive filled in confirmations they could just indicate amount agrees without checking records

Question 13

What do auditors need to do after determining type of confirmation to send out?

Answer 13

determine their sample size

Question 14

What do auditors consider when determining sample size?

Answer 14

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

Question 15

What do auditors do after determining the necessary sample size?

Answer 15

decide which customers to send the confirmations to

Question 16

What do auditors do after picking their sample?

Answer 16

create the confirmations they will send out

Question 17

What should auditors do when receiving completed confirmations?

Answer 17

check the appropriate confirmation listed on the confirmation control sheet

Question 18

What if there is no response to the confirmations?

Answer 18

auditors can perform alternative procedures to test the existence assertion for that particular item

Question 19

What do auditors do after receiving returned confirmations and performing alternative procedures for unreturned confirmations?

Answer 19

auditors need to analyze audit evidence from these procedures

Question 20

What do auditors do after identifying all misstatements?

Answer 20

sum the misstatements and then estimate the total amount of misstatement in the population based on the total amount of misstatement in the sample

Question 21

How do auditor’s conclude if a balance is materially misstated?

Answer 21

compare estimated misstatement in the population against the set amount of tolerable misstatement

Question 22

When is a balance materially misstated?

Answer 22

if estimated misstatement exceeds tolerable misstatement and suggest an audit adjustment

Question 23

How is the completeness assertion tested for accounts receivable?

Answer 23

indicates that all accounts receivable that exist have been recorded, use cut-off testing

Question 24

What is cut-off testing?

Answer 24

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

Question 25

How is the valuation assertion tested for AR?

Answer 25

states that all recorded AR are recorded at appropriate value in accordance with GAAP, assess the sufficiency of the allowance for doubtful accounts

Question 26

What is the primary factor that affects the value of AR?

Answer 26

collectibility

Question 27

How is the sufficiency of allowance for doubtful accounts tested?

Answer 27

look at the aged AR report and test whether individual balances are included in proper buckets

Question 28

How is the rights and obligations assertion tested?

Answer 28

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