Question

Sikon & Spiros CPAs, was auditing D'Alessandro Industries, Inc. Sikon & Spiros sent positive accounts receivable confirmations to a number of D'Alessandro's government customers. They received a number of return confirmations marked "We do not confirm balances because we are on a voucher system."

Required:

a. List alternative procedures that Sikon & Spiros might use to ensure the validity of these accounts.

b. Assuming all the procedures you list are viable optons for the D'Alessandro audit, which procedures do you believe provides the highest-quality evidence and why?

Answer 1

Answers are as under :

1) alternative procedures that Simon & Spiros might use to ensure the validity of these accounts are :

a. Check and confirm the balances of related parties and inter companies directly,

b. Auditor should compare and analysis the data of account receivables to corresponding sales bill. Also they should verify the bank receipt with reference to outstanding account balances and sales invoices.

c. Ageing report should be prepared by the auditor to get the details of long outstanding account receivable

d. Auditor should follow the substantive process as under :

Auditor should check the policy for the making provision for doubt full debt and for writing off the receivable.

Every quarterly , receivable audit should be conducted by auditor to check that whether all receivable are written off as per the policy set.

Account receivables samples should be selected and for the selected samples payment received from customer in bank should be mapped against invoice and sales order . The reason for outstanding payment should match the credit sales policy of the company

Should check the basis of writing off account receivables

b. Assuming all the procedures you list are viable options for the D'Alessandro audit, which procedures do you believe provides the highest-quality evidence and why?

From above listed option , Substantive testing will provide the highest degree of quality evidence because of the following reasons :

1) Substantive testing provides the sufficient appropriate audit evidences which help to prove the assertions like accuracy, completeness, valuation , presentation and disclosure

2) Substantive testing involve the test of transactions and details test of account receivables, sales, bank receipt and detailed analytical procedure

3) When the auditors check the completeness of account receivable , further audit procedure can be conducted. It can be done with the help of substantive testing only

4) It check the collection in subsequent period

5) It review the adequacy of account balances

6) With the help of substantive transaction, list of omitted transaction can be known