Chapter08 - answer - CHAPTER 8 SUBSTANTIVE TESTS OF...

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8-1. Tests of details of financial balances are designed to determine the reasonableness of the balances in sales, accounts receivable, and other account balances which are affected by the sales and collection cycle. Such tests include confirmation of accounts receivable, and examining documents supporting the balance in these accounts. Tests of transactions for the sales and collection cycle are intended to determine the effectiveness of internal control structure and to test the substance of the transactions which are produced by this cycle. Such tests would consist of examining sales invoices in support of entries in the sales journal, reconciling cash receipts, or reviewing the approval of credit. The results of the tests of transactions will be used to affect the procedures, sample size, timing and particular items selected for the tests of details of financial balances (i.e., an effective internal control structure will result in reduced testing when compared to the tests of details required in the case of an inadequate internal control structure). 8-2. There are two common types of confirmations used for confirming accounts receivable: “positive” confirmations and “negative” confirmations. A positive confirmation is a communication addressed to the debtor requesting him to confirm directly whether the balance as stated on the confirmation request is correct or incorrect. A negative confirmation is also a communication addressed to the debtor, but it requests a response only when the debtor disagrees with the stated amount. A positive confirmation is more reliable evidence because the auditor can perform follow-up procedures if a response is not received from the debtor. With a negative confirmation, failure to reply must be regarded as a correct response even though the debtor may have ignored the confirmation request. Offsetting the reliability disadvantage, negative confirmations are less expensive to send than positive confirmations, and thus more of them can be distributed for the same total cost. The determination of which type of confirmation to be sent is an auditor’s decision, and it should be based on the facts in the audit. The following CHAPTER 8 SUBSTANTIVE TESTS OF RECEIVABLES AND SALES
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8-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition are the most important circumstances where positive confirmations should be used: 1. There are a small number of large accounts which account for a significant portion of total accounts receivable. 2. There are suspected conditions of dispute, inaccuracy, or irregularity. This would be the case when internal controls are considered inadequate or if prior year’s audit test results are unsatisfactory. 3.
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This note was uploaded on 01/03/2012 for the course ACC 284 taught by Professor Sevton during the Spring '11 term at Abraham Baldwin Agricultural College.

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Chapter08 - answer - CHAPTER 8 SUBSTANTIVE TESTS OF...

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