Accounts Receivable Confirmations
Read the case and answer the questions that follow.
Audit standards require analytical procedures at two stages during the audit: at the risk assessment (planning) phase and again at the end of the audit. They are optionally used as a substantive procedure during the course of an audit.
Often times it does not seem to be productive or effective for auditors to send accounts receivable confirmations, yet the standards require it. It is important that auditors understand how to maximize effectiveness and efficiency in this required audit procedure.
Read the case. Then answer the questions based on it.
Audit standards indicate that there is a presumption that auditors will confirm accounts receivable unless the balance is immaterial, confirmations are deemed ineffective, or the auditors' assessment of risk is low and other procedures will achieve the same objective. However, these instances are considered few and far between and current trends in auditing indicate that there is an expectation that accounts receivable will be confirmed. Auditors may stratify the population, use haphazard or judgmental sampling, and send positive or negative requests.
Jenner & Jenner CPAs are the auditors for the Leno Company. In reviewing the accounts receivable aging, the auditors learn that there is a high number of accounts with balances, there are some very large and very small balances, and many customers' balances consist of multiple invoices.
1. Should Jenner & Jenner CPAs send accounts receivable confirmations?
2. How should the auditors mitigate the risk associated with both very large and very small balances?
3. Because so many customer balances consist of multiple invoices, what could the auditors do to eliminate unnecessary reconciliation?
4. What procedures can be performed on customers who do not respond?
Audit of Accounts Receivable
Audit of Accounts Receivable is a confirmation and verification of the collectible accounts of the company. This audit consists of sales and cash since the accounts receivable account is mainly used in sales and collection.
Answer and Explanation:
1. Yes, Jenner & Jenner CPAs shall send accounts receivable confirmations to the customers to know if they have the same amount.
2. The auditors should stratify the accounts into groups, and then pick a sample for each group for a material amount. In this way, the entire group will be accounted for.
3. In order to assure the reconciliation and accuracy of the amount, pick at least five customers to conduct reconciliation from the top three largest, one smallest and one middle range.
4. Conduct substantive test in the collection process and receipts of the company. Check the collection receipt against the sales invoice to ensure the accounts receivable amount.
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from Accounting 101: Financial AccountingChapter 7 / Lesson 1