Question 2. Internal control tests of accounts receivable (6 points) The auditor

Question

Question 2. Internal control tests of accounts receivable (6 points)

The auditor tested internal controls of the sales and collection cycle and made the following assessments:

1. Please determine the audit objective for accounts receivable corresponding to each transaction-based audit objective in column V and the associated risk level in column VI. Please provide your answers in the table above. (4 points)

2. Please give an example of an audit procedure that can help the auditor to achieve the following audit objectives (2 points)

a. Existence of accounts receivable

b. Cutoff of credit sales

Explanation / Answer

1. Audit objectives for accounts receivable for sales

Accounts receivable reflected in balance sheet are for valid transactions, exist and include all transactions occured dutind the period. Billings are for correct amount and are issued for all transactions.

2. Audit objectives for accounts receivable for cash collection

All cash receipts are accounted for and prepared for all transactions, for correct amounts and uncollectible accounts are promptly identified and provided for; allowances for uncollectible accounts are adequate.

2. Audit procudure for

a. Existence of accounts receivable

- External confirmation of receivables on a sample basis

- Follow up all balance disagreementss and non replies to the receivables confirmation

- Review after date cash receipts by inspecting bank statement and cash receipt documentation

- Examining documents like PO, invoices etc.

b. Cutoff of credit sales

- accounts receivable testing by sending them letters asking to confirm balance owed

- sequential invoicing

- understanding company's policies and procedures

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