Question

QUESTION 4
The following misstatements are sometimes found in the sales and collection cycle’s account balances

a. Several account receivables in the accounts receivable subsidiary ledger are not included in the aged trial balance

b. cash received from collections of accounts receivable in the subsequent period is recorded as current period receipts

c. the allowance for doubtful debts is inadequate because of the client’s failure to reflect the current downturn in the economy when determining the doubtful debts allowanced

d. several accounts receivable are in dispute as result of claims of defective merchandise

e. good shipped and included in the current period sales were returned in the subsequent period

f. long-term interest-bearing loans receivable from affiliated companies are included in accounts receivable.

Required:

For each misstatement
a. explain one internal control that should prevent the misstatement.
b. describe one test of details of balances audit procedure that the auditor can use to detect the misstatement  

Answer 1

A(i) As part of internal control Aged trial balance should match the total Trail Balance.

(ii) As audit Procedure we should match the totals of all ageing column with total account receivables.

b) (i) All receipt should be recorded through asset account and not through revenue account. This can be done through fixing the ledgers for Revenue Transactions in ERP enviroment.

(ii) Auditor should ensure that the accrual concept of accounting is followed i.e revenue is booked at the time of accrual not at the time of Receipt.He has to examine recording of transaction at the time of invoicing and at the time of receipt.

(c) (i)We should use past historical data and apply materiality concept if client is unable to justify data.

(ii) We should examine the last year disclosures and compare it with this year disclosures.

(d)(i) We should implement that at the time of receipt of Goods by customer he should be aware that in what time he should report the defect and he should know the procedure for Reporting the dispute to company.

(ii) Auditor has to examine that the reporting of defect material has to be immediatly accounted for refering the Invoice of sale which would validate the amount disclosed in Balance sheet.