Accounts Receivable

Which of the following strategies most likely could improve the response rate of the confirmations of accounts receivable? a. Restrict the selection of accounts to be confirmed to those customers with large balances. b. Include a list of items or invoices that constitute the customer's account balances. c. Explain to customers that discrepancies will be investigated by an independent third party. d. Ask customers to respond to the confirmation requests directly to the auditor by fax.

b. Include a list of items or invoices that constitute the customer's account balances. This answer is correct because including details to make the confirmation process simpler for the respondent is likely to increase the response rate. This answer is incorrect because customers with large balances may or may not be more likely to reply as compared to customers with small balances; also, eliminating all small balances is not valid statistically.

An auditor will be least likely to use a negative accounts receivable confirmation form when a. Internal control surrounding accounts receivable is effective. b. A large number of small balances are involved. c.The number of requests mailed will be minimal. d. Customers are unlikely to confirm the information.

d. Customers are unlikely to confirm the information. This answer is correct because if the auditor believes that customers are not likely to confirm the information, positive confirmations should be used. This answer is incorrect because in situations where the number of requests to be mailed would be minimal, the auditor may use either positive or negative confirmation.

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose a. Customers with credit balances. b. Small account balances. c. Individual overdue balances. d. Individual invoices.

d. Individual invoices. individual invoices This is correct because sampling individual invoices may make it easier for customers to reply accurately (particularly when those customers use a voucher system in which liabilities are recorded by individual purchase).

An auditor's analytical procedures performed near the end of the audit indicated that the client's accounts receivable had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor? a. The client liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings. b. Twice as many accounts receivable were written off in the prior year than in the current year. c. A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue" category than in the prior year. d. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

d. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet. This answer is correct because the opening of a second retail outlet with credit sales approximating the older, established outlet, and a consistent credit policy are likely to result in such a situation.

Which of the following is the best argument against the use of negative accounts receivable confirmations? a. The cost per response is excessively high. b. There is no way of knowing if the intended recipients received them. c. Recipients are likely to feel that in reality the confirmation is a subtle request for payment. d. The inference drawn from receiving no reply may not be correct.

d. The inference drawn from receiving no reply may not be correct. This answer is correct because failure to reply would cause the auditor to assume that the recipient agrees with the confirmation request. Should the recipient disregard the confirmation request despite the fact that the balances do not agree, the auditor would be incorrect in making this assumption.

It is not appropriate to refer a reader of an auditor's report to a financial statement note for details concerning a. Subsequent events. b. The pro forma effects of a business combination. c. Sale of a discontinued operation. d. The results of confirmation of receivables.

d. The results of confirmation of receivables. This answer is correct because the results of confirmation of receivables (as well as the results of other audit procedures) are not disclosed in a note to the financial statements. Matters related to the scope of the audit are not referred to in the financial statements.