Question

I am having a hard time understanding this. Could you help me?

As the manager of the external audit team, you realize that the EAM writes only material invoices to the audit file for the accounts receivable confirmation process. You are immediately concerned that the accounts receivable account my be substantially overstated this year and for the prior years in which this EAM was used.

Required: Explain why you are concerned since all “material” invoices are candidates for confirmation by the customer. Outline a plan for determining if the accounts receivable are overstated.

Answer 1

Any item, transaction that can affect the presentation of financial statements is known as material item or transaction. While auditing, the auditor considers all the transactions that can materially effect the outcome of auditing. All these types of material items that can effect the opinion of the auditor required to be adequetely disclosed and reported.

In the given case, auditor is concerned with material invoices as these invoices form part of accounts receivable with significant amount. But at the same time, he should also consider the invoices with lesser amounts too in case these invoices are large in numbers with lower values.

In case of material invoices, balance confirmations have been asked through a system of EAM but in other case there is no such system present. So other invoices, which are insignificant or im-material (taking into consideration the value of the invoice), should also be taken into account and checked thoroughly as these invoices has not been covered by EAM for confirmation purposes.