 Multiple Choice Questions

16-19 a. (4) b. (2) c. (4)

16-20 a. (3) b. (4) c. (4)
16-21 a. (1) b. (1) c. (1)

16-22 a. Several important factors are worth considering. Firstly, the expansion in
regions and increasing use of accounts receivables calls into question
whether accounts receivables and the related allowance for doubtful
accounts are properly valued (realizable value). If the client is unfamiliar
with their new customer base, the risk of bad debt might be unusually
high, reducing the amount of receivables that may be collected in the
future. Relatedly, new clients in foreign countries might make purchases
in their local currency. If Teklas does not convert sales into cash, they will
have added currency risk that might not be realizable in the same value
as reported in the financial statement.

b. With an increase in sales, increasing accounts receivable is typical. The

proportion of receivables that will remain collectible, however, might
change. For example, a business that maintains $100,000 of receivables
and a doubtful accounts balance of $8,000 (8% of receivables) might not
be able to collect the same proportion if receivables increase to
$1,000,000. This may be because of increasing sales to increasingly risky
customers. Alternatively, the company may not have sufficient resources
to follow-up with the additional number of debtors if the accounting team
does not increase proportionally.

c. Negative confirmation can always be used as part of the audit procedure

to test the accounts receivables balance, but it might not be appropriate to
solely rely on negative confirmation. One of the requirements to solely rely
on negative confirmation is a reasonable expectation that recipients will
take the confirmation request seriously. Since many of the debtors are
new clients, the auditor has no basis to determine whether they will take
the confirmation requests seriously.

d. The question states that it is customary for companies to factor

receivables to speed up collections. The auditor can test whether the
client has rights to the receivables by reviewing the minutes of board
meetings to see if factoring was approved, check loan agreements to see
if any receivables have been used as collateral, or by directly asking
management whether they have given up any rights to the receivables.
16-26

a. b.
PROCEDURE TYPE OF TEST BALANCE-RELATED AUDIT OBJECTIVE
1 Test of details Existence and accuracy
2 Test of details Cutoff
3 S T of T Cutoff
Accuracy and existence
(may also include realizable value if cash
4 Test of details receipts examined are for older accounts)
5 S T of T Classification
6 S T of T Rights
7 Test of details Completeness
8 ST of T Existence
9 Test of control Accuracy
10 S T of T Completeness
11 Test of details Detail tie-in
12 S T of T Detail tie-in
13 Test of details Classification

16-28

AUDIT PROCEDURE AUDIT OBJECTIVE

a. Add the columns on the aged trial (1) Accounts receivable are correctly added
balance and compare the total with the and agree with the master file and the
general ledger. general ledger.
b. Discuss with the sales manager whether (6) Cutoff for accounts receivable is correct.
any sales allowances have been granted
after the balance sheet date that may
apply to the current period.
c. Compare the date on a sample of (3) Existing accounts receivable are
shipping documents throughout the year included.
with related duplicate sales invoices and
the accounts receivable master file.
d. Compare the date on a sample of (6) Cutoff for accounts receivable is correct.
shipping documents a few days before
and after the balance sheet date with
related sales journal transactions.
e. Review minutes of board meetings and (8) The client has rights to accounts
loan documents to see if accounts receivable.
receivables have been sold or used as
 collateral.
f. Send positive confirmation to a large (2) Recorded accounts receivable exist
sample of the client’s debtors, And 4 Accounts receivable are accurate.
requesting that they confirm the
existence and dollar amount of their
outstanding receivable.