18 Questions
When is the auditor not required to use external confirmations for accounts receivable?
When the overall accounts receivable balance is immaterial.
What is the primary difference between positive and negative confirmations?
Positive confirmations are more reliable, while negative confirmations are less costly.
Under what circumstances can negative confirmations be used as the sole substantive audit procedure?
When the auditor has assessed the risk of material misstatement as low, the population of items is made up of a large number of small, homogenous account balances, and the auditor expects a low exception rate.
What happens if the auditor decides not to confirm accounts receivable that are material?
The justification for not confirming must be documented in the audit files.
What is the primary purpose of a positive confirmation?
To confirm directly whether the balance as stated is correct or incorrect.
When can the auditor use confirmations as the sole substantive audit procedure?
When the auditor has assessed the risk of material misstatement as low, the population of items is made up of a large number of small, homogenous account balances, and the auditor expects a low exception rate.
What is the most common reason for differences in confirmations?
Clerical errors and disputed amounts
What should the auditor do when all differences have been resolved?
Reevaluate internal control
What is the purpose of an evidence-planning worksheet?
To guide the design of audit procedures for accounts receivable
What type of misstatement may be indicated by a customer's response that goods have not been received?
Recording of a sale before shipment
What is the purpose of investigating payment differences that have already been made?
To identify lapping or theft of cash
What should the auditor do if a significant number of misstatements occurred that are inconsistent with the original assessment of control risk?
Reassess the internal control and consider the effect on the audit
What is the primary concern of auditors when auditing liabilities?
Understatement
What is the purpose of sending confirmations to vendors with which the client does business?
To confirm the balance of accounts payable
What is the focus of the overall objective in the audit of accounts payable?
To determine whether the accounts payable balance is fairly stated and properly disclosed
What is the purpose of examining underlying documentation for subsequent cash disbursements?
To detect unrecorded accounts payable
When would it be appropriate to use vendor invoices and statements available for auditing accounts payable?
When detection risk is low
What is the purpose of tracing receiving reports issued before year-end to related vendor’s invoices?
To detect unrecorded accounts payable
Learn about the objectives and procedures of auditing accounts payable, including substantive tests of balance and the importance of detecting understatements. Understand the differences in emphasis between auditing assets and liabilities.
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