Question

1) Regarding the timing of confirmations, the most reliable evidence is obtained when they are sent to the auditee's customers:

a- several months before year-end, so the auditor will have adequate time to perform alternate procedures if they are required

b- at various times throughout the year to difficult sections of the sample, so that the entire sample is representative of account balances scattered throughout the year

c-at close to the balance sheet data as possible

d- at various times throughout the year to the same group in the sample, so that the sample will not have a time basis.

2)For which of the following assertions would an auditor most likely plan the lowest detection risk for accounts receivable?

a-completeness

b- cut-off

c- existence

d- classification

Answer 1

1. The correct answer is "C" : as close to the balance sheet date as possible.

This is because we are auditing the accounts receivable number coming in the financial statements as on balance sheet date. Hence we need to obtain evidence as to the existence of that accounts receivable balance on the balance sheet date. Hence it is always preferable to send the accounts receivable confirmations as close to the balance sheet date as possible. Infact most auditors ask the auditee's customers to confirm the balance as on the balance sheet date only instead of the date on which confirmations are sent/received.

2. The correct answer is "C" : Existence

The two most important assertions which have a high risk of material misstatement with respect to accounts receivable are valuation and existence. Debtor confirmations are sent for confirming the existence of the debtor. It is the most important procedure as a company may put in fake entries to inflate its receivable balances, however a third party would never confirm that balance which helps the auditor in confirming the existence and value of that accounts receivable.

Low detection risk means that the auditor will accept lower level of misstatements since there is high risk in the particular area. Hence the auditor will most likely plan a low detection risk for the existence assertion.