CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceMedium
An auditor is evaluating the client's allowance for doubtful accounts. The client operates in a highly cyclical industry and has experienced a recent downturn. Which of the following audit procedures would provide the MOST persuasive evidence regarding the valuation assertion for accounts receivable?
- ARecomputing the aging of accounts receivable and the client's historical write-off rates.
- BObtaining a management representation letter confirming the reasonableness of the allowance.
- CComparing the current year's allowance for doubtful accounts balance to prior periods and industry averages.
- DReviewing subsequent cash receipts for accounts receivable balances outstanding at year-end.
Show answer & explanationAnswer & explanation
Correct answer: D. Reviewing subsequent cash receipts for accounts receivable balances outstanding at year-end.
Reviewing subsequent cash receipts provides direct and highly relevant evidence that the accounts receivable were collectible at year-end, which directly supports the valuation assertion. This evidence is more persuasive than analytical comparisons or recomputations based on historical data, especially in a cyclical industry.
Why the other options are wrong
- A. Recomputing the aging and historical rates relies on client data and past trends, which may not be indicative of future collectibility in a downturn. It's a useful procedure but less persuasive than actual cash collection.
- B. A management representation letter is required but is not considered persuasive audit evidence on its own, as it is self-serving and not externally verifiable.
- C. This is an analytical procedure, which provides persuasive evidence but is less direct than subsequent cash receipts, especially in a volatile industry. It helps identify potential misstatements but doesn't confirm collectibility directly.
Subsequent Cash Receipts (Accounts Receivable)
Reviewing cash payments received from customers after the balance sheet date for accounts receivable balances outstanding at year-end provides strong evidence regarding the collectibility and valuation of those receivables.
- Directly confirms collectibility of specific balances.
- Most effective for the valuation assertion of accounts receivable.
- Performed for a period after year-end but before the audit report date.
Memory trick: Cash in hand, value is planned.