Question

1) Following are three different situations with respect to the audit of accounts receivable and sales. For each, specify the evidence mix that you would use (tests of control, substantive tests, type of confirmation/timing), and explain why.

C) Big Department Store Finance Corporation has fifty staff in the accounting department, a sophisticated software package, and about $250 million in accounts receivable. The corporation manages the department store's credit cards. About 100 000 credit card customers have balances less than $300 on their accounts, while the balances for the remaining customers range up to a maximum of $5000.

Answer 1

The situation is described in (C). If we look precisely, it is mentioned that cooperation has $250 million in account receivables. This information a company gets from its financial reports, so the financial reports should be properly made so that there are no misinterpretations.

There are several controls used by the corporation to do the financial reporting. It is very important to test these controls so that it can be made sure that the controls being used are quite efficient to bring the correct interpretation of the financial status.

Test of controls is a auditing procedure which makes sure that controls being used are efficient in every manner. Because these controls set conducts for making financial statements. And these statements should be very correct because they are used for furhet analysis. So test of controls is very important. Testing controls would help keep assurance that whatever records we see, like the one of accounts receivables, they are correct figures.

Moving on to the substantive test, we know that financial statements contain supporting document that needs to be tested for assuring that the statement do no carry any error. This audit procedure of testing financial statements and supporting documents is the substantive test.

Once this test is performed, which are the pending amounts, what are the credit balances renainjing, all are Cleary mentioned in statements and they also contain supporting documents to verify the statement. As mentioned corporation is having sophisticated software package, it can run a cross check on statement and supporting documents to verify this and if no error seems to be, this would mean that statements are correctly made. If there are any problems, the staffs in account g departments have been distributed their work. They again work upon it and make ready the statements.

This the substantive testing.

Type of confirmation and timing is related to the confirmation that data no number of credit cards and their balances are correct and confirmed. Thses data are also saved in the software corporation has. The amounts and figures gets automatically added and removed as per the activities taking place dat to day.

Softwares also keep a check on the balance and their timings of being paid. Every thing in the system is auto updated.

So here i have explained with evidence all the above mentioned mix uses and how they are of importance to the given situation.