(Substantive tests of accounts receivable) The following situations were not dis
ID: 2416547 • Letter: #
Question
(Substantive tests of accounts receivable) The following situations were not discovered by an inexperienced staff auditor in the audit of the Parson Company.
1.Several accounts were incorrectly aged in the client's aging schedule.
2.The accounts receivable turnover ratio was far below expected results.
3.Goods billed were not shipped.
4.Some year-end sales were recorded in the wrong accounting period.
5.Several sales were posted for the correct amount but to the wrong customers in the accounts receivable ledger.
6.The allowance for uncollectable accounts was understated.
7.Several sales were entered and posted at incorrect amounts.
8.Mathematical errors were made in totaling the accounts receivable ledger.
9.An unrecorded sale at the balance sheet date was collected in the next month.
10.Several fictitious sales were recorded.
11.The pledging of some customer accounts as security for a loan was not reported in the balance sheet.
12.Some year-end cash receipts were recorded in the wrong accounting period.
Required
a)Identify the substantive test that should have detected each error.
b)For each substantive test identified in (a), indicate the account balance audit objective to which it pertains.
c)Indicate the type of evidence obtained (i.e., physical, confirmations, documentary, written representations, mathematical, oral, or analytical) from each substantive test.
(Use a tabular format for your answers with one column for each part.)
Explanation / Answer
2.The accounts receivable turnover ratio was far below expected results.
4.Some year-end sales were recorded in the wrong accounting period.
Situations Substantive test Identified Account balance audit objective Type of evidence obtained 1.Several accounts were incorrectly aged in the client's aging schedule. Compare Age % to prior year Accounts recievable To ascertained whether collection are coming on timely basis. confirmations, and written representations from clients.2.The accounts receivable turnover ratio was far below expected results.
AR Analytical Test i.e,AR/AP, AR turnover To ascertained how many time collection is made from clients and to minimise Bad debts. documentary, Bank Accounts , Debtors Account 3.Goods billed were not shipped. Vouching of shipping records, inspection of delivery documents, cut off test of last month billing For proper and timely delivery of goods documentary,analytical4.Some year-end sales were recorded in the wrong accounting period.
Inspection of records, cut off test of bills/invoice issued subsequent to year end Record bills inrespective accounting period for aging, documentary,analytical 5.Several sales were posted for the correct amount but to the wrong customers in the accounts receivable ledger. Inspection of Individual client account by taking written representations of clients ledger To ascertained correct balnce of respective clients. written representations,mathematical 6.The allowance for uncollectable accounts was understated. Check the ratio of allowance to old AR and compare to PY.Analytical procedure For correct valuation and allocation mathematical, analytical 7.Several sales were entered and posted at incorrect amounts. Confirmation of AR Enter correct figure of sales confirmations, documentary, written representations, 8.Mathematical errors were made in totaling the accounts receivable ledger. Recalcualte all ledger balances Ascertain correct balance .Mathematical 9.An unrecorded sale at the balance sheet date was collected in the next month. Post subsequnt cash to AR balance at year end. Reperfomance record Completeness, cut-off .Mathematical 10.Several fictitious sales were recorded. Confirm customer balnce To ascertain correct sale figure Confirm 11.The pledging of some customer accounts as security for a loan was not reported in the balance sheet. Review of security agreements.Inspection of records. Idenentify Rights and obligation,Occurence Physical, Documentary 12.Some year-end cash receipts were recorded in the wrong accounting period. Cash Cut-off testing, Inspection of records Identify correct balance of cash and AR. Completeness and occurance Physical,mathematicalRelated Questions
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