CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceEasy
An auditor is evaluating the reasonableness of a client's allowance for doubtful accounts. Which of the following audit procedures would provide the MOST appropriate evidence regarding the valuation assertion for accounts receivable?
- AVouching a sample of recorded sales transactions to supporting shipping documents.
- BPerforming analytical procedures comparing the current year's bad debt expense to prior years.
- CReviewing subsequent cash receipts for a sample of year-end accounts receivable balances.
- DConfirming a sample of accounts receivable balances directly with customers.
Show answer & explanationAnswer & explanation
Correct answer: C. Reviewing subsequent cash receipts for a sample of year-end accounts receivable balances.
Reviewing subsequent cash receipts directly addresses whether the accounts receivable balances were collectible, thereby providing strong evidence for their valuation. If cash was received, the receivable was likely valued correctly.
Why the other options are wrong
- A. Vouching sales to shipping documents primarily tests the occurrence and existence of sales, not the valuation of accounts receivable.
- B. Analytical procedures provide general evidence but are less direct and conclusive for valuation than specific evidence like subsequent cash receipts.
- D. Confirming balances primarily tests existence and rights and obligations, and to a lesser extent, accuracy, but not directly collectibility or valuation.
Subsequent Cash Receipts (Accounts Receivable)
An audit procedure involving the examination of cash received from customers after the balance sheet date to determine the collectibility and proper valuation of accounts receivable at year-end.
- Provides strong evidence for the valuation assertion.
- Helps assess the collectibility of accounts receivable.
- Performed for a sample of year-end receivables.
Memory trick: Valuation is about if the cash will ARRIVE.