16–21
16–30 (continued)
sometimes offer satisfactory evidence. The auditor should also
examine shipping documents, sales invoices, contracts, or other
documents to substantiate that the charges were proper.
In unusual cases, the CPA should mail a third request and
16–31 a. Tim needs to consider the likelihood of receiving responses, the
efficiency of the confirmation process, and the reliability of audit
evidence obtained from the different approaches. If a low
response rate to written confirmations is expected, then Tim may
reliable. Electronic methods may be more susceptible to someone
intercepting and altering the response.
b. The audit firm needs to perform procedures to verify the email
firm should obtain the login information directly from the third party
providing the access. The extent of procedures the auditor
performs to verify that addresses are accurate and that responses
have not been altered will depend on the assessed risk of fraud.
16–22
Copyright © 2017 Pearson Education, Inc.
16–32 a. Tests of controls and substantive tests of transactions related to
the allowance for doubtful accounts include the following:
approval.
2. Substantive tests of transactions for posting and
summarization and aging of accounts receivable.
3. Substantive tests of transactions for bad debt charge–offs.
4. Tests of controls over follow–up on past due accounts.
receivables in each aging category follows.
increased from $75,000 to $90,000, it decreased as a percentage
of accounts receivable from 7.27% in 2015 to 6.25% in 2016. An
receivable as the prior year.
In addition, current accounts receivable decreased from
67.42% to 62.28% of accounts receivable. The amount of past
due receivables increased from $335,892 to $543,346. The
12/31/2016
12/31/2015
Allowance as a % of
accounts receivable
6.25%
7.27%
Charge–offs as a % of sales
0.94%
0.99%
Percentage of receivables
in each aging category
0–30 days
62.28%
67.42%
30–60 days
17.65%
15.62%
60–90 days
11.93%
10.28%
Over 90 days
8.14%
6.68%
Total
100.00%
100.00%
16–23
Copyright © 2017 Pearson Education, Inc.
16–33 a. Confirmation responses that represent timing differences are due
to such items as payments and shipments in transit. Responses
that represent likely timing differences are:
#2 – represents a likely payment in transit
#5 – represents a likely shipment in transit
Item #3 refers to a payment after year–end. This is not a timing
difference, but an apparent misunderstanding by the customer as
to the required response.
date of the transactions.
b. It is difficult to determine whether a confirmation difference is a
misstatement without further investigation.
#6 appears to represent a misstatement as the client does not
is likely to be adjusted.
#9 indicates that goods were shipped on consignment, and
appears to represent a misstatement.
c. For all of the exceptions, the auditor is concerned about four
principal things:
Sometimes customers misunderstand the confirmation or
the information requested. The auditor must distinguish
between those and client errors.
(2) The amount of the client error if any.
(3) The cause of the exception. It could be intentional, a
Suggested steps to clear each of the comments satisfactorily are:
1. (a) Examine supporting documents, including the sales
invoices and applicable sales and shipping orders, for
propriety and accuracy of the sales.
16–24
16–33 (continued)
receipts should be an important consideration in
payment of invoices supporting the December 31 trial
balance, consideration should be given to requesting a
confirmation from the PDQ Company of the invoices paid
by their checks.
2. This is an apparent timing difference. The auditor should examine
3. This is a confirmation of the balance with an additional comment
agrees with the company’s records.
4. (a) The cause should be investigated thoroughly. If the cash
wrong account may indicate lapping.
(b) Such a comment may also indicate a delay in posting and
corrective steps.
5. This appears to represent a shipment in transit. The auditor
should evaluate the shipping document and evaluate whether it is
reasonable that the customer received the goods on January 5th.
6. (a) Determine if such advance payment has been received and
against such advances have been properly handled.
(b) If the advance payment was to cover these invoices, the
auditor should propose a reclassification of the $1,350,
debiting the advance payment account and crediting
accounts receivable – trade.
7. (a) The auditor should be alert to the possibility of a fictitious
sale or receivable. The auditor should verify the address
(b) Examine the shipping order for indications that the goods
were shipped and, if available, carrier’s invoice and/or bill
of lading for receipt of the goods.
16–25
16–33 (continued)
8. This should be discussed with the appropriate officials and
accounts should be set up.
9. As title on any goods shipped on consignment does not pass until
those goods are sold, the sales entry should be reversed,
adjustment should be made for all consignment shipments.
10. This may indicate a misposting of the credit or a delay in posting
16–34
CHANGE IN CIRCUMSTANCE
LIKELY TEST OF DETAILS
OF BALANCES RESPONSE
1. Substantive analytical procedures
indicated a significant slowing in
accounts receivable turnover.
d. Expand the review of cash receipts
after year–end to evaluate the
collectibility of accounts receivable.
2. The client entered into sales
contracts with new customers that
differ from the client’s standard sales
contracts.
b. Send positive confirmations that
include requests for information on
side agreements and special terms.
3. The client had a significant increase
in sales near year–end.
e. Increase the sample size for sales
cutoff testing for sales recorded
before year–end.
4. Accounts receivable confirmations
were ineffective due to a very low
response rate in the prior year audit.
i. Perform alternative procedures to
test the existence and accuracy of
accounts receivable instead of
sending positive confirmations.
5. The client began experiencing an
increase in returns due to product
changes that resulted in increased
defects.
a. Expand testing of sales returns after
year–end and compare the level of
returns with the prior year.
16–26
16-34 (continued)
CHANGE IN CIRCUMSTANCE
LIKELY TEST OF DETAILS
OF BALANCES RESPONSE
6. You found several pricing errors in
your substantive tests of transactions
for sales.
g. Increase the sample size for positive
confirmations of accounts receivable.
7. In performing substantive test 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.
h. 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.
8. The client entered into a new loan
agreement with the bank. Accounts
receivable are pledged as collateral
for the loan.
f. Send a confirmation to the bank
confirming amounts pledged as
collateral under loan agreements.
9. The client did not reconcile the
accounts receivable subledger with
the accounts receivable balance in
the general ledger on a regular basis.
c. Increase the number of accounts
traced from the accounts receivable
trial balance to the accounts
receivable subledger.
16–35 a. If called upon to evaluate the adequacy of the sample size, the
type of confirmation used, and the percentage of accounts
confirmed, the following additional information would be required:
The number of accounts that had positive balances at
12/31/16
The performance materiality of total accounts receivable
b. If the amounts are material, it is necessary to perform follow–up
procedures for positive confirmations not returned by the debtor. It
“alternative procedures.”
16–27
16–35 (continued)
examined copies of checks or remittance advices if they were
available or traced the amounts to the bank deposit slip and into
the bank statement. The cash receipts listed for confirmation
request no. 9 total in excess of the balance due at 12/31/16; the
applies to the balance at 12/31/16.
The alternative procedures for confirmation request no. 26
show a small payment for which no indication of the invoice to
which it applies is given. The auditor examined a duplicate sales
invoice, which may or may not support the balance at 12/31/16.
account receivable.
Case
16–36 a. There are four major factors affecting business risk and
likelihood of financial failure.
3. The hospital has incurred significant deficits in the past.
4. County taxes may not be able to make up the deficits, as
they have in the past.
b. The following are major inherent risks:
1. In the audit of accounts receivable and property, plant, and