CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceHard
An auditor is evaluating the reasonableness of a client's allowance for doubtful accounts. The client operates in an industry experiencing an economic downturn. The auditor obtains an aged trial balance and calculates historical write-off percentages for each aging category. Which of the following additional procedures would provide the most persuasive evidence regarding the valuation of the allowance?
- AConfirming a sample of accounts receivable balances with customers.
- BInquiring of management about their process for estimating the allowance.
- CRecomputing the client's allowance calculation based on management's assumptions.
- DReviewing subsequent cash receipts for a sample of overdue accounts.
Show answer & explanationAnswer & explanation
Correct answer: D. Reviewing subsequent cash receipts for a sample of overdue accounts.
Reviewing subsequent cash receipts for overdue accounts provides highly persuasive evidence about collectibility because it's a direct, objective observation of the actual collection of an account. While other procedures are useful, direct observation of cash receipts is often the most definitive proof of collectibility, especially in an uncertain economic environment.
Why the other options are wrong
- A. Confirmations provide evidence of existence and rights, but less directly about collectibility, especially for overdue accounts.
- B. Inquiry provides understanding but is generally the least persuasive type of audit evidence on its own, as it's management's representation.
- C. Recomputing verifies mathematical accuracy but does not provide evidence about the reasonableness of the underlying assumptions, especially in a downturn.
Subsequent Cash Receipts (Accounts Receivable)
An audit procedure involving the examination of cash received by the client after the reporting period to determine if accounts receivable balances were collected, providing evidence of their collectibility.
- Directly tests the valuation assertion for accounts receivable.
- Highly persuasive evidence of collectibility.
- Performed for a sample of accounts outstanding at year-end.
Memory trick: For collectibility, cash in hand beats promises.