All FIVE questions are compulsory and MUST be attempted
Accounts receivable confirmations are a useful method of obtaining audit evidence relating toaccounts receivables.
(a) In relation to accounts receivables confirmations:(i) explain the difference between a positive and a negative confirmation(ii) explain the two different types of positive confirmation and the advantagesand disadvantages of each(iii) give some examples of reconciling items highlighted by accounts receivablesconfirmations.
(b) Describe the principal risks associated with financial statement assertions relating toaccounts receivables.
(c) Goodfoot is a small company which manufactures high quality shoes and sells themto small retailers. This is your first year as auditor. Goodfoot has a receivables ledgerwith approximately 750 accounts. A number of the accounts are old, some have nil orcredit balances and some should probably be written off. The company’s client baseis mixed. Bad accounts have generally represented about 2% of the total accountsreceivable figure and a general provision of 1.5% has been made in the past inaddition to any specific provisions. Most of the bad receivables relate to smallercustomers but there are some very slow-moving larger accounts in the current year.The total value of accounts receivable is $750,000, 60% of which comprises some 30large accounts and 40% of which comprises a large number of small accounts.You have tested the system of internal controls over receivables and it appears to beworking adequately. In your experience accounts receivable confirmations in thissector generally have a response rate of just over 50%.
(i) Describe the audit work you will perform on accounts receivable and baddebts at Goodfoot.
(ii) Develop a lead schedule for the receivables section of your audit workingpapers.
required to perform numerical calculations in this question.
(Total: 30 marks)
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