Question

16-35 The following are various changes in audit circumstances.

Audit Circumstance

1. The client began experiencing an increase in returns due to product changes that resulted in increased defects.

2. You found several pricing errors in your substantive tests of transactions for sales.

3. In performing substantive tests of transactions for cash receipts, you found that receipts were promptly recorded in customer accounts, but there were delays in depositing the receipts at the bank.

4. The client entered into a new loan agreement with the bank. Accounts receivable are pledged as collateral for the loan.

5. The client did not reconcile the accounts receivable subsidiary records with the accounts receivable balance in the general ledger on a regular basis.

6. Substantive analytical procedures indicated a significant slowing in accounts receivable turnover.

7. The client entered into sales contracts with new customers that differ from the client’s standard sales contracts.

8. The client had a significant increase in sales near year end.

9. Accounts receivable confirmations were ineffective due to a very low response rate in the prior-year audit.

Match each change in audit circumstance with the most likely test of details of balances response. Each response is used once.

a. Expand testing of sales returns after year end and compare the level of returns with the prior year.

b. Send positive confirmations that include requests for information on side agreements and special terms.

c. Increase the number of accounts traced from the accounts receivable trial balance to the accounts receivable subsidiary records.

d. Expand the review of cash receipts after year end to evaluate the collectability of accounts receivable.

e. Increase the sample size for sales cutoff testing for sales recorded before year end.

f. Send a confirmation to the bank confirming amounts pledged as collateral under loan agreements.

g. Increase the sample size for positive confirmation of accounts receivable.

h. While at the client’s premises at year end, obtain information on the last few cash receipts at year end for cash receipts cutoff testing.

i. Perform alternative procedures to test the existence and accuracy of accounts receivable instead of sending positive confirmations.

Answer 1

1 - a) Expand testing of sales returns after year end and compare the level of returns with the prior year.

2 - h) While at the client’s premises at year end, obtain information on the last few cash receipts at year end for cash receipts cutoff testing.

3 - d) Expand the review of cash receipts after year end to evaluate the collectability of accounts receivable.

4 - f) Send a confirmation to the bank confirming amounts pledged as collateral under loan agreements.

5 - c) Increase the number of accounts traced from the accounts receivable trial balance to the accounts receivable subsidiary records.

6 - g) Increase the sample size for positive confirmation of accounts receivable.

7 - b) Send positive confirmations that include requests for information on side agreements and special terms

8 - e) Increase the sample size for sales cutoff testing for sales recorded before year end.

9 - I) Perform alternative procedures to test the existence and accuracy of accounts receivable instead of sending positive confirmations.