Question

Part Ill Case Studies (20 points) Accounts Receivable - Alternative I Case Study Facts: able Your audit team is meeting in early September, 2019 to plan the audit of a distributor as of December 31, 2019. The team is about to plan the audit of accounts receivable, a very material amount on the client's balance sheet. The team: Sets Audit Risk as low Assesses Inherent Risk as high Assesses Control Risk as high Derives Detection Risk as low Will not test Internal controls Decides to send Positive Accounts Receivable Confirmations Issues: As of what date would you confirm Accounts Receivable? What other procedures would you perform in auditing Accounts Receivable especially as a result of your confirmation date decision above?

Answer 1

Issue 1:-

Accounts receivable will be confirmed on December 31, 2019 .

Issue 2:-

Other procedures that will be taken to perform auditing of Accounts Receivable are as follows:-

• Will check whether Bad Debts are shown right. This can be done by comparing the proportion of bad debt expenses to sales of this year with prior years to see if current years expenses are reasonable.
• Check whether revenue is correctly recognized. Sometimes company tends to show extra revenue. Sometimes company bill the consumers for sale despite still retaining goods on site.
• Trend of sales and accounts receivable should be checked to see any unusual trend.
• Check if there is any Related Party receivables, check collection from them and see whether such transaction are not recorded as wages or dividends and also whether it had proper authorization.
• Will check the Provision for Doubtful debt made , this can be done checking whether the ledger balance and Report match the static balance.
• Check sales return.This should be done to check sales return made by the customers.Sometimes company ships more goods to there customers near the end of audit period than consumers had authorized. For this receiving log should be reviewed.
• Check the total of invoices on accounts receivable ageing report to check the total traced to the general ledger is correct.