Question

A “best practice” in auditing is to very clearly document the description of your audit scope (i.e. the criterion used to develop your sample). The scope should be so thoroughly described that an auditor with a reasonable amount of experience could use the scope in the original work paper to come up with the same or very similar sample.

Assume that you have been assigned to create a stratified sample that will be used to test the Accounts Receivables balance. Your task is to determine a dollar cutoff level, above which all customer balances will be selected for confirmation. The cutoff level should result in testing approximately 34% of the balance. In addition, the manager on the audit would like you to include in your sample an additional 3 haphazardly selected balances.

Total Receivable Balance Amount

$          9,354,845.00

What dollar amount results in testing approximately 34% of the balance. Briefly describe how you arrived at this dollar amount.

Answer 1

This is the test of “good debt” and “bad and doubtful debts”. In the process of doing so 34% rate is considered, the amount out of which is bad and doubtful debts and the remaining AR balance becomes good debt.

Bad and doubtful debts = AR balance × Rate

                                        = $ 9,354,845.00 × 34%

                                        = $ 3,180,647.30 (Answer)

This is the amount that has immense doubtful to be recovered from debtors.

Additional balances:

Out of the total AR balance ($9,354,845.00), 3 accounts balances could be chosen as $37,565, $821,540, and $1,321,500 (figures are imaginary).

Bad and doubtful debts = AR balance × Rate

                                        = $ 37,565 × 34%

                                        = $ 12,772.10

Bad and doubtful debts = AR balance × Rate

                                        = $ 821,540 × 34%

                                        = $ 279,323.60

Bad and doubtful debts = AR balance × Rate

                                        = $ 1,321,500 × 34%

                                        = $ 449,310