Audit Ch 16

Balance Related Audit Objectives

-Detail tie-in -Existence -Completeness -Accuracy -Classification -Cutoff -Realizable Value -Rights

Confirmation of A/R

-Most important/useful test of details of balances for A/R -Helps with Existence, Accuracy, and Cutoff objectives

Transaction Related Audit Objectives

-Occurrence -Completeness -Accuracy -Posting and summarization -Classification -Timing

Which of the following is least likely to be a reasonable explanation for an increase in accounts receivable turnover?

Allowance of a new grace period for customer payments

As a result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should

Consider the possibility of a misstatement in the financial statements.

How Materiality is set

1st: Preliminary judgment is set for FS's as a whole 2nd: Performance materiality is set for each significant BS account

The client began experiencing an increase in returns due to product changes that resulted in increased defects.

Expand testing of sales returns after year-end and compare the level of returns with the prior year.

Substantive analytical procedures indicated a significant slowing in accounts receivable turnover.

Expand the review of cash receipts after year-end to evaluate the collectibility of accounts receivable.

The client did not reconcile the accounts receivable subsidiary records with the accounts receivable balance in the general ledger on a regular basis.

Increase the number of accounts traced from the accounts receivable trial balance to the accounts receivable subsidiary records.

You found several pricing errors in your substantive tests of transactions for sales.

Increase the sample size for positive confirmations of accounts receivable.

The client had a significant increase in sales near year-end.

Increase the sample size for sales cutoff testing for sales recorded before year-end.

The negative form of accounts receivable confirmation request is useful except when

Individual account balances are relatively large

Which of the following procedures will an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Inspect the shipping records documenting the merchandise sold to the debtors.

An auditor's preliminary analysis of accounts receivable turnover revealed the following rates over these accounting periods: 2016 (4.3) 2015 (66.2) 2014 (7.3): Which of the following is the most likely cause of the decrease in accounts receivable turnover?

Liberalization of credit policy

Accounts receivable confirmations were ineffective due to a very low response rate in the prior year audit.

Perform alternative procedures to test the existence and accuracy of accounts receivable instead of sending positive confirmations.

An auditor who is auditing accounts receivable would least likely perform which of the following tests?

Select cash disbursements made shortly after year-end and examine the supporting documentation such as receiving reports and vendor invoices.

The client entered into a new loan agreement with the bank. Accounts receivable are pledged as collateral for the loan.

Send a confirmation to the bank confirming amounts pledged as collateral under loan agreements.

The auditor sends out positive accounts receivable confirmations for a client. Assuming a second confirmation is sent out to a major customer who still fails to respond, the auditor should:

Send out a third confirmation request and if no response, perform alternative procedures.

The client entered into sales contracts with new customers that differ from the client's standard sales contracts.

Send positive confirmations that include requests for information on side agreements and special terms.

Which of the following audit procedures will best uncover an understatement of sales and accounts receivable?

Test a sample of sales transactions, selecting the sample from prenumbered shipping documents.

Which of the following will likely provide the most assurance concerning the accuracy balance-related objective for accounts receivable?

Vouch amounts in the subsidiary ledger to details on shipping documents.

In performing substantive tests of transactions for cash receipts, you found that receipts were promptly recorded in customer accounts, but there were delays in depositing the receipts at the bank.

While at the client's premises at year-end, obtain information on the last few cash receipts at year-end for cash receipts cutoff testing.

The return of a positive confirmation of accounts receivable without an exception attests to the

accuracy of the receivable balance.

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because

customers may not be inclined to report understatement errors in their accounts.

After a CPA has determined that accounts receivable have increased as a result of slow collections in a "tight money" environment, the CPA will be likely to

expand tests of collectibility