CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceHard
An auditor is testing the allowance for doubtful accounts for a client that primarily sells on credit. Which of the following procedures would provide the most reliable evidence regarding the valuation of accounts receivable?
- AReviewing the client's aging schedule and discussing significant past due accounts with management.
- BExamining subsequent cash receipts for a sample of accounts receivable.
- CConfirming a sample of accounts receivable balances with customers.
- DInquiring of credit department personnel about collection efforts.
Show answer & explanationAnswer & explanation
Correct answer: B. Examining subsequent cash receipts for a sample of accounts receivable.
Examining subsequent cash receipts provides direct and objective evidence that the accounts receivable were indeed collectible, thus supporting their valuation. This is generally more reliable than inquiries or discussions.
Why the other options are wrong
- A. Reviewing the aging schedule and discussing with management provides some evidence but requires corroboration, as management's estimates can be biased.
- C. Confirmations primarily test existence and rights/obligations, not necessarily valuation (collectibility). A confirmed balance might still be uncollectible.
- D. Inquiries alone are not highly reliable evidence.
Subsequent Cash Receipts (Accounts Receivable)
An audit procedure that involves reviewing cash payments received from customers after the balance sheet date, which provides strong evidence about the collectibility and valuation of accounts receivable at year-end.
- Highly reliable evidence for valuation assertion.
- Directly confirms collectibility.
- Performed for a sample of accounts receivable balances.
Memory trick: COLLECT: Cash, Observe, Look, Evaluate, Confirm, Test.