Exam 16: Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

For sales, the completeness transaction-related audit objective affects the existence balance-related audit objective.

It is acceptable under generally accepted accounting principles for the client to include material related party receivables together with trade receivables on the balance sheet.

How might the auditor determine whether a client has limited rights to accounts receivable?

Describe each of the following types of confirmations: • positive confirmation • blank confirmation • invoice confirmation • negative confirmation

If the client's internal control for recording sales returns and allowances is evaluated as ineffective,

Negative confirmations normally require a larger sample size than positive confirmations.

It is not common for audit clients to misstate cutoff either by error or through fraud.

For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper cutoff of cash

A type of positive confirmation known as a blank confirmation

Tests of the realizable value balance-related audit objective are for the purpose of evaluating the allowance for doubtful accounts.

Stratification of accounts receivable is desirable when using confirmations.

When determining the timing of the accounts receivable confirmations,

Briefly describe the circumstances in which it is acceptable to use negative confirmation requests.

Describe three audit procedures an auditor would use to test for the realizable value balance-related audit objective.

The auditor assesses inherent risk for accounts receivable, considering client risk and the nature of the audit client and the nature of the industry which the client is operating in.

When making the sampling decisions for accounts receivable confirmations,

Cutoff misstatements can occur for sales, sales returns, and cash receipts. List below the threefold approach an auditor performs for each account above to determine the reasonableness of the cutoff.

The auditor studies the client's industry and external environment, and also evaluates management objectives and business processes to identify significant client risks that could affect the accounts receivable balance.

To test for the completeness balance-related audit objective, the auditor should review the accounts receivable trial balance for large or unusual items.

Which audit procedure would be used to test for the existence balance-related audit objective?