Reference no: EM132558709

Confirmation of Trade Accounts Receivable. L. King, CPA, is auditing the financial statements of Cycle Company, a client that has receivables from customers arising from the sale of goods in the normal course of business. King is aware that the confirmation of accounts receivable is a generally accepted auditing procedure.

Required:
a. Under what circumstances could King justify omitting the confirmation of Cycle's accounts receivable?

b. In designing confirmation requests, what factors are likely to affect King's assessment of the reliability of confirmations that King sends?

c. What alternative procedures could King consider performing when replies to positive confirmation requests are not received?

Audit Objectives and Procedures for Accounts Receivable. In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Here is a selection of accounts receivable assertions:

a. Accounts receivable represent all amounts owed to the client company at the balance sheet date.

b. The client company has a legal right to all accounts receivable at the balance sheet date.

c. Accounts receivable are stated at net realizable value.

d. Accounts receivable are properly described and presented in the financial statements.

Required:
For each of these assertions, select the following audit procedure (numbered 1-7) that is best suited for the audit plan. Select only one procedure for each audit objective. A procedure may be selected once, not at all, or more than once.

1. Analyze the relationship of accounts receivable and sales and compare with relationships for preceding periods.

2. Perform sales cutoff tests to obtain assurance that sales transactions and corresponding entries for inventories and cost of goods sold are recorded in the same and proper period.

3. Review the aged trial balance for significant past due accounts.

4. Obtain an understanding of the business purpose of transactions that resulted in accounts receivable balances.

5. Review loan agreements for indications of whether accounts receivable have been factored or pledged.

6. Review the accounts receivable trial balance for amounts due from officers and employees.

7. Analyze unusual relationships between monthly accounts receivable and monthly accounts payable balances.