NAME : SAFIRA YAFIQ KHAIRANI

NIM: 1802112130
Review Question Chapter 16
1. Distinguish among tests of details of balances, tests of controls, and substantive tests of transactions
for the sales and collection cycle. Explain how the tests of controls and substantive tests of transaction
affect the tests of details of balances.
Answer:
Tests of details of balances are purpose to determine the reasonableness of the balances in sales,
accounts receivable, and other account balances that are affected by the sales and collection cycle. Such
tests include confirmation of accounts receivable and examining documents supporting the balance in
these accounts. Tests of controls and substantive tests of transactions for the sales and collection cycle
are intended to determine the effectiveness of internal controls and to test the substance of the
transactions that are produced by this cycle. Such tests consist of activities such as examining sales
invoices in support of entries in the sales journal, reconciling cash receipts, or reviewing the approval of
credit. The results of the tests of controls and substantive tests of transactions affect the procedures,
sample size, timing, and items selected for the tests of details of balances.
2. Sharizat is a new audit trainee at Khairy Chartered Accountants. She was asked to perform the
following tests by her supervisor. The accounts supervisor at the company’s client, Lau Ah Pek Berhad,
uses Microsoft Excel worksheets to prepare the accounts. Lau Ah Pek Berhad is not willing to invest in
accounting software. You are the audit supervisor. Explain to Sharizat why she is doing the following
task:
 Cast the balances to the Accounts Receivables subledger and compare the total with the general
ledger.
 Randomly select any invoice and trace it to the Accounts Receivable ledger.
 Trace transactions in the Accounts Receivable subledger to stock records.
 Check the casting in the Accounts Receivable Control account.
 Check to see whether invoices issued after the cut-off date are in the customer’s accounts at the
year-end date.

Answer:
 Cast the balances to the Accounts Receivables sub ledger and compare the total with the general
ledger.
To obtain assurance that the accounts receivable balances listed on the balance sheet are
supported by reliable accounting records that the recording mechanism is correct, then I
recalculate the accounts receivable balances in the ledger. To obtain assurance regarding the
accuracy of calculating the accounts receivable balance, the auditor recalculates the accounts
receivable balance by adding the initial balance to the amount debited and subtracting the
account's crediting amount. It is that as part of the assessment of the risks of material
misstatement, the auditor determines whether the identified risks are significant risks
 Randomly select any invoice and trace it to the Accounts Receivable ledger.
 Because Sharizat is a new auditor, in order to avoid misstatement, it must look at the
synchronization between transaction evidence and recorded evidence in the company. Because
identifying significant risks is part of planning, considering that auditing standards require
auditors to gain an understanding of the entity's control to evaluate the design and
implementation of controls.
 Trace transactions in the Accounts Receivable sub ledger to stock records.
Namely to prevent and avoid fraud in company records, since internal control over sales
and receipts of cash and related receivables is at least effective enough for most companies
because management is concerned with keeping accurate records to maintain good customer
relations.
 d. Check the casting in the Accounts Receivable Control account.
Because testing of trade receivables is based on the auditor's risk assessment procedures
that provide insight into the client's business and industry. As part of this understanding, the
auditor studies the client's industry and external environment and evaluates management
objectives and business processes to identify significant client business risks that may affect
financial statements, including trade receivables.
 Check to see whether invoices issued after the cut-off date are in the customer’s accounts at the
year-end date.
Because for most companies, internal control over sales and cash receipts and related
trade receivables should at least be effective enough because management desperately wants
accurate records to maintain good customer relationships.
3. List five analytical procedures for the sales and collection cycle. For each test, describe a
misstatement that could be identified
Answer:
The following are analytical procedures for the sales and collection cycle, and potential
misstatements uncovered by each test. Each ratio should be compared to previous years. Analytical
Procedure Potential Misstatement
- Gross margin by product line Sales cutoff errors or other misstatements involving sales purchase cutoff
errors or other misstatements involving inventory or purchases.
- Sales returns and allowances as a percentage of gross sales by product line or segment All returns were
not recorded, or shipments to customers were not in accordance with specifications and were returned.
- Trade discounts taken as a percentage of net sales Discounts that were taken by customers and
allowed by the company were not recorded.
- Bad debts as a percentage of gross sales Misstatement in determining the allowance for uncollectible
accounts.
- Days sales in receivables outstanding A problem with collections, potentially causing an
understatement of bad debts and allowance for uncollectible accounts.
- Aging categories as a percentage of accounts receivables Collection problems and understatement of
allowance for uncollectible accounts.
- Allowance for uncollectible accounts as a percentage of accounts receivable Misstatement in
determining the allowance for uncollectible accounts.
- Comparison of the balances in individual customers' accounts over a stated amount with their balances
in the previous year problem with collections and therefore a misstatement of the allowance for
uncollectible accounts, or cutoff errors or other misstatements in customer accounts.

4. Your client, Amah.com, organizes a special year end sale, from Boxing Day to New Year’s Day every
year. Explain why it is important to separate the proceeds of the sales on New Year’s Eve prior from the
sales on New Year’s Day.
Answer:
The statement illustrates how the misuse of statistical estimation can import the use of an
otherwise valuable audit tool. The auditor's mistake is treats the point estimate as if it is the true
population value, instead of but one possible value in a statistical distribution. Rather than judge whether
the point estimate is material, the auditor should construct a statistical confidence interval around the
point estimate, and consider whether the interval indicates a material misstatement. Among other
factors, the interval will reflect appropriate levels of risk and sample size.

5. Identify the eight accounts receivable balance-related audit objectives. For each objective, list on
audit procedure.
Answer:
The following are balance-related audit objectives and related audit procedures for the audit of accounts
receivable. Balance-Related Objective Audit Procedure
- Accounts receivable in the aged trial balance agree with related master file amounts, the total is
correctly added and agrees with the general ledger (detail tie-in). Trace twenty accounts from the trial
balance to the related accounts in the master file. Use audit software to foot the aged trial balance, and
trace the total to the general ledger.
- The accounts receivable in the aged trial balance exist (existence). Confirm accounts receivable using
positive confirmations. Confirm all amounts over $ 15,000 and a statistical sample of the remainder.
- Existing accounts receivable are included in the aged trial balance (completeness). Trace ten accounts
from the accounts receivable master file to the aged trial balance.
- Accounts receivable in the trial balance are accurately recorded (accuracy). Confirm accounts
receivable using positive confirmations. Confirm all amounts over $ 15,000 and a statistical sample of
the remainder.
- Accounts receivable in the aged trial balance are properly classified (classification). Review the
receivables listed on the aged trial balance for notes and related party receivables.
- Transactions in the sales and collection cycle are recorded in the proper period (cutoff). Select the
last 10 sales transactions from the current year's sales journal and the first 10 from the subsequent year's
and trace each one to the related shipping documents, checking for the date of actual shipment and the
correct recording.
- Accounts receivable in the trial balance are owned (rights). Review the minutes of the board of
directors for any indication of pledged or factored accounts receivable.
- Accounts receivable in the trial balance are stated at realizable value (realizable value). Discuss with
the credit manager the likelihood of collecting older accounts. Examine subsequent cash receipts and the
credit file on older accounts to evaluate whether receivables are collectible.

6. Which of the eight accounts receivable balance-related audit objectives can be partially satisfied by
confirmations with customers?
Answer:
The most important objectives satisfied by confirmations are existence, rights, and accuracy. In
extreme cases, confirmations are also useful tests for cutoff. Sometimes confirmations may also help the
auditor satisfy the completeness objective.

7. State the purpose of footing the total column in the client's accounts receivable trial balance, tracing
individual names and amounts to the accounts receivable master file, and tracing the total to the general
ledger. Is it necessary to trace each amount to the master file? Why?
Answer:
A necessary audit procedure is to test the information on the client's trial balance for detail tie-in.
The footing in the total column and the columns depicting the aging must be checked and the total on
the trial balance reconciled to the general ledger to determine that all accounts are included in the listing.
The master file records are the tie-in between tests of controls, substantive tests of transactions, and tests
of details of balances. The aged trial balance is the listing of the master file. Since the auditor uses the
aged trial balance in tests of details, he or she must be sure that information is the same as that tested in
tests of controls and substantive tests of transactions. In addition to tests of computerized controls over
the master file and aged trial balance, the auditor usually traces a sample of individual balances to the
master file to determine that the trial balance has been properly summarized from the master file. In
most cases, it will not be necessary to trace each amount to the master file unless a significant number of
misstatements is noted and it is determined that reliance cannot be place upon the trial balance with less
than 100% testing.

8. Distinguish between accuracy tests of gross accounts receivable and tests of the realizable value of
receivables
Answer: The purpose of the accuracy tests of gross accounts receivable is to determine the correctness
of the total amounts receivable from customers. These tests normally consist of confirmation of accounts
receivable or examination of shipping documents in support of the shipment of goods to customers. The
purpose of the test of the realizable value of receivables is to estimate the amount of the accounts
receivable balance that will not be collected. To estimate this amount, the auditor normally reviews the
aging of the accounts receivable, subsequent cash payments by customers, discusses the collectibility of
individual accounts with client personnel, and examines correspondence and financial statements of
significant customers.
9. The customer of your client Nikesh Pte. Ltd. Was very unhappy with balance stated in the letter of
confirmation of accounts receivable. The customer was unhappy because the balances in your letter
were much higher than in the customer’s records. Explain possible reasons for this.
Answer: When a confirmation request is returned by the customer, the auditor shall determine the
reasons for any reported discrepancies. In many cases, they are caused by the time difference between
client and customer records. It is important to distinguish between time differences and exceptions,
which represent misstatements of outstanding balances. The most common types of differences reported
in confirmation include:
- Payment Has Been Made
- Items Not Received.
- Item Has Been Returned.
- Common Errors and Number of Disputes

10. Distinguish between a positive and a negative confirmation and state the circumstances in which
should be used. Why do CPA firms sometimes use a combination of positive and negative
confirmations?
Answer:
There are two common types of confirmations used for confirming accounts receivable:
"positive" confirmations and "negative" confirmations. A positive confirmation is a letter, addressed to
the debtor, requesting that the recipient indicates directly on the letter whether the stated account balance
is correct or incorrect and, if incorrect, by what amount. A negative confirmation is also a letter,
addressed to the debtor, but it requests a response only if the recipient disagrees with the amount of the
stated account balance. A positive confirmation is more reliable evidence because the auditor can
perform follow-up procedures if a response is not received from the debtor. With a negative
confirmation, failure to reply must be regarded as a correct response, even though the debtor may have
ignored the confirmation request.
Offsetting the reliability disadvantage, negative confirmations are less expensive to send than positive
confirmations, and thus more of them can be distributed for the same total cost. The determination of
which type of confirmation to be sent is an auditor's decision, and it should be based on the facts in the
audit. Auditing standards indicate that it is acceptable to use negative confirmations only when all of the
following circumstances are present:
1. The auditor has assessed the risk of material misstatement as low and has obtained sufficient
appropriate evidence regarding the design and operating effectiveness of controls relevant to the
assertion being tested by the confirmation procedure.
2. The population of items subject to negative confirmation procedures is made up of a large number of
small, homogeneous, account balances, transactions, or other items.
3. The auditor expects a low exception rate.
4. The auditor reasonably believes that recipients of negative confirmation requests will give the
requests adequate consideration.
Typically, when negative confirmations are used, the auditor is using a reduced control risk assessment
in the audit of accounts receivable. It is also common to use negative confirmations for audits of
hospitals, retail stores, and other industries where the receivables are due from the general public. In
these cases, far more assurance is obtained from tests of controls and substantive tests of transactions
than from confirmations. It is also common to use a combination of negative and positive confirmations
by sending the positives to accounts with large balances and negatives to those with small balances. This
allows the auditor to focus the confirmation testing on large account balances, while still testing a
representative sample from the rest of the population at minimal cost.
11. Under what circumstances is it acceptable to confirm accounts receivable before the balance sheet
date?
Answer:
It is acceptable to confirm accounts receivable prior to the balance sheet date if the internal
controls are adequate and can provide reasonable assurance that sales, cash receipts, and other credits
are properly recorded between the date of the confirmation and the end of the accounting period. Other
factors the auditor is likely to consider in making the decision are the materiality of accounts acceptable
and the auditor's exposure to lawsuits because of the possibility of client bankruptcy and similar risks. If
the decision is made to confirm accounts receivable prior to year-end, it is necessary to test the
transactions occurring between the confirmation date and the balance sheet date by examining internal
documents and performing analytical procedures at year-end.
12. State the most important factors affecting the sample size in confirmation of accounts receivable
Answer:
The most important factors affecting the sample size in confirmations of accounts receivable are:
Performance materiality Inherent risk (relative size of total accounts receivable, number of accounts,
prior year results, and expected misstatements) Control risk Achieved detection risk from other
substantive tests (extent and results of substantive tests of transactions, analytical procedures, and other
tests of details) Type of confirmation (negatives normally require a larger sample size)
13. Discuss whether email responses and oral responses are acceptable confirmation responses. How can
an auditor verify the addresses for confirmations sent by mail and confirmations electronically?
Answer:
Auditing standards indicate an oral response, including a response received over the telephone, is
not considered a confirmation, but constitutes other evidence in support of a receivable balance. The
email responses are considered to be valid confirmation responses if the auditor can be confident in the
identity of the confirmation respondent. Auditors can verify addresses to phone directories, or to
information in the client's accounts receivable master file if the client has adequate controls over the
master file. Email responses can be verified by third party intermediaries, or by verifying the domain of
the email address.
14. Under what circumstances would an auditor choose to confirm information such as the right of
return or special sales terms in addition to the customer balance?
Answer:
 An auditor might choose to confirm information such as the right of return or special sales terms
when they suspect aggressive revenue recognition techniques such as channel-stuffing or bill-and-hold
sales. The auditor may have identified such risks when performing analytical procedures, particularly if
sales in the fourth quarter of the year are unexpectedly high. Alternatively, if the auditor notes sales
returns are particularly high following year-end, they might suspect channel-stuffing and change the
audit approach for confirmations.
15. Define what is meant by alternative procedures in the confirmation of accounts receivable and
explain their purpose. Which alternative procedures are the must reliable? Why?
Answer:
Alternative procedures are procedures performed on a positive confirmation not returned by the
debtor using documentation evidence to determine whether the recorded receivable exists and is
collectible. It is common to send second requests for confirmations and sometimes even third requests.
Even with these efforts, some customers do not return the confirmations, so it is necessary to follow up
with alternative procedures. The objective of the alternative procedures is to determine, by a means
other than confirmation, whether the unconfirmed account existed and was properly stated at the
confirmation date. For any confirmation not returned, the following documentation can be examined to
verify the existence and accuracy of individual sales transactions making up the ending balance in
accounts receivable:
a. Subsequent cash receipts Evidence of the receipt of cash subsequent to the confirmation date includes
examining remittance services, entries in the cash receipts records, or perhaps even subsequent credits in
the accounts receivable master file. The examination of evidence of subsequent cash receipts is usually
the most useful alternative procedure because it is reasonable to assume that a customer would not make
a payment unless it was a valid receivable. On the other hand, the fact of payment does not establish
whether there was an obligation on the date of the confirmation. In addition, care should be used to
match each unpaid sales transaction with evidence of its payment as a test for disputes or disagreements
over individual outstanding invoices.
b. Duplicate sales invoices. These are useful to verify the actual issuance of a sales invoice and the
actual date of the billing.
c. Shipping documents. These are important to establish whether the shipment was actually made and as
a test of cutoff.
d. Correspondence with the client. Usually it is unnecessary to review correspondence as a part of
alternative procedures, but it can be used to disclose disputed and questionable receivables not
uncovered by other means.

16. Explain why the analysis of differences is important in the confirmation of accounts receivable, even
if the misstatement in the sample are not material
Answer:
Confirmation of accounts receivable is normally performed on only a sample of the total
population. The purpose of the confirmation is to obtain outside verification of the balance of the
account and to obtain an indication of the rate of occurrence of misstatements in the accounts. Most
misstatements which are indicated by the differences on the confirmation replies will not be material,
however, each difference must be analyzed to determine its effect and all others considered together on
the total accounts receivable balance. Though the individual differences may not be material, they may
indicate a material problem when extended to the entire population, and with regard to the internal
controls over the accounts receivable.
17. State three types of differences that might be observed in the confirmation of accounts receivable
that do not constitute misstatements. For each, state an audit procedure that will verifiy the difference.
Answer:
Three differences that may be observed in the confirmation of accounts receivable that do not
constitute misstatements, and an audit procedure that would verify each difference are as follows:
a. Payment has been made by the customer, but not received by the client at the confirmation date. The
subsequent payment should be examined as to the date deposited.
b. Merchandise shipped by the client has not been received by the customer at the confirmation date.
The shipping documents should be examined to verify that the goods were shipped prior to confirmation
date.
c. Merchandise has been returned, but has not been received by the client at the confirmation date.
Receiving documents and the credit memo should be examined.

18. What is the relationship of each of the following to the sales and collection cycle: flowcharts,
assessing control risk, tests of control, and tests of details of balances?
Answer:
With regard to the sales and collection cycle, the auditor uses flowcharts, assessing control risk
for the accounting cycle, tests of controls, and tests of details of balances in the determination of the
likelihood of a material mission in the accounts affected by the sales and collection cycle. The
flowcharts provide a means for the auditor to document and analyze the accounting systems as
represented by the client. The auditor would then make an initial assessment of control risk based on the
controls which are present in the accounting cycle as documented in the flowcharts, and would plan the
tests of controls based upon the selection of the significant controls. The auditor would then perform the
tests of the significant controls to determine the effectiveness of the controls and to plan the substantive
tests that are necessary based upon the revised assessment of control risk for this accounting cycle.
Finally, after considering the results of tests of controls and substantive tests of transactions, the auditor
would perform tests of details of balances to determine whether material misstatements exist in the
account balances.
19. Why does an auditor review sales returns subsequents to year-end? What audit objectives does this
procedure satisfy?
Answer:
The accounting standard requires sales returns and allowances to be adjusted against related sales
if the amounts are material. One of the purposes of evaluating sales return activity after the end of the
year is to identify whether the sales returns recorded are adequate. However, most companies record re
sales and allowances in the period in which they are incurred, assuming roughly the same amounts,
offset each other at the beginning and end of each accounting period. This approach is acceptable, if the
amount is not significant.