Shared Flashcard Set


Chapter 10
Undergraduate 3

Additional Accounting Flashcards




3 circumstances in which the auditor can omit confirming accounts receivable

  • The accounts receivable are immaterial to the financial statements
  • The use of confirmations would not be effective as an audit procedure
  • The auditor's assessment of inherent risk and control risk is low, and evidence gathered from other substantive tests is sufficient to reduce audit risk to an acceptably low level

3 factors that affect the reliability of accounts receivable confirmations

  • The type of confirmation request
  • Prior experience with the client or similar engagements
  • The intended respondent

Positive Confirmations

requests that customers indicate whether they agree with the amount due to the client stated in the confirmation – used when an account’s individual balances are large or if errors are anticipated

Negative confirmations

customers respond only when they disagree with the amount due to the client – used when there are many accounts with small balances, control risk is assessed to be low, and the auditor believes that the customers will devote adequate attention to the confirmation

Examples of Substantive Analytical Procedures for Revenue

  • Comparison of gross profit percentage by product line with previous years' and industry data
  • Comparison of reported revenue to budgeted revenue
  • Analysis of the ratio of sales in the last month or week to total sales for the quarter or year
  • Comparison of revenues recorded daily for periods shortly before and after the end of the audit period for unusual fluctuations such as an increase just before and a decrease just after the end of the period
  • Comparison of details of units shipped with revenues and production records and consideration of whether revenues are reasonable compared to levels of production and average sales price
  • Comparison of the number of weeks of inventory in distribution channels with prior periods for unusual increases that may indicate channel stuffing
  • Comparison of percentages and trends of sales into the distributor channel with industry and competitors' sales trends, if known

Examples of Substantive Analytical Procedures for Accounts Receivable, Allowance for Uncollectible Accounts, and Bad-Debt Expense
  • Comparison of receivables turnover and days outstanding in accounts receivable to previous years' and/or industry data
  • Comparison of aging categories on aged trial balance of accounts receivable to previous years
  • Comparison of bad-debt expense as a percentage of revenue to previous years' and/or industry data
  • Comparison of the allowance for uncollectible accounts as a percentage of accounts receivable or credit sales to previous years' and/or industry data
  • Examination of large customer accounts individually and comparison to previous years
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