Confirmation Procedure of Account Receivable

E. Why does the auditor not use the same tolerable misstatement or percentage of account balance for all financial statement accounts?

Reviewing the trial balance for the entire year to see all transaction are accurately accounted for.

We conducted several processes to test the accounts receivable of Wealthy Watches Inc. At the beginning, we agreed the balance of the accounts receivable detail listing to the trial balance and subsequently to the financial statements to ensure completeness of the population.

Also he may conduct bank reconciliations on pertinent accounts to make sure no discrepancies or misstatements are found. The auditor should also perform vertical and horizontal analysis for the income statements and balance sheets by the use of ratios.

Auditors also evaluate the client’s recording of transactions by verifying the monetary amounts of transactions, a process called substantive tests of transactions. For example, the auditor might compare the unit selling price on a duplicate sales invoice with the approved price list as a test of the accuracy objective for sales transactions. Like the test of control in the preceding paragraph, this test satisfies the accuracy transaction-related audit objective for sales. For the sake of efficiency, auditors often perform tests of controls and substantive tests of transactions at the same time.

4. Additional testing may still be required even if the error is corrected by the client. Many other errors during the month of April could have occurred on the accounting clerk’s watch that the auditor needs to do further testing to be sure no material misstatements are present. Some of these testing could be seeing what other duties the accounting clerk had during that month. Checking the client’s internal control for the entire entity could also be necessary to ensure that controls are in place for training employees that may need to fill the roles of a peer.

In order to confirm the accounts receivable balances, I decided to use positive confirmations since this was my first time auditing the company and the collateral for the loan would be the receivables. The confirmations helped to verify the accuracy and existence of the accounts. I also calculated the Receivables Turnover Ratio in order to better evaluate the overall success of collection on accounts. The sample size that I chose was determined by the factors of tolerable misstatement, inherent risk, control risk, achieved detection risk

1. The Allowance for uncollectible accounts currently has a credit balance of $900. After analyzing the accounts in the accounts receivable subsidiary ledger, the company's management estimates that uncollectible accounts will be $15,000. What will be the amount of uncollectible accounts expense reported on the income statement?

Identify the accounts that you would test, and select at least three (3) analytical procedures that you would use in your audit.

1a) What should the auditor consider when determining whether an account should be considered significant?

The total Accounts Receivable balance in the records of $4,752,257.70 was verified by setting a filter of

The allowance for doubtful accounts is lower than last year even though the receivables and the revenue are higher. This does not follow any form of consistency in that case. GAAP only allows the establishment of the allowance for doubtful accounts that are supported by appropriate analyses and that the policy is well documented and applied consistently from period to period. Again, without additional information the consistency item is an issue here.

b. Trace the line item “Balance per Bank Statement” – Accuracy and Existence (AU-C 315.A114 a-iii, b-i)

The proportion of the total dollar amount receivable I included in the confirmation request is in “Account Receivable Aging Analysis” by diving the total amount that is collectible “C” by the total amount of sales. The result is 82% ($9,803,430/$11,920,028) of the total dollar balance in accounts receivable.

Analytical procedures can often point to areas that are out of sync with the prior results of the firm. Auditors should look closely at changes in the gross profit ratio and unusual changes in revenues or expenses. Once unusual results have been identified, auditors must search for reasonable explanations. If the explanations provided seem implausible then the auditor must expand the scope of testing and obtain additional corroborating evidence.