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Misstatements in Confirming Individual Accounts Receivable Balances

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In confirming individual accounts receivable balances, your client's customers reported the exceptions listed below.
Which of these exceptions should be considered misstatements for evaluation purposes, assuming that misstatements are defined as

(a) differences that affect the account balance and
(b) differences that affect pretax income?

Explain your reasoning in each instance.
1. The wrong trade discount was used.
2. The client charged sales tax to a tax-exempt customer.
3. The client failed to record returned merchandise.
4. The invoice contained a clerical error.
5. The payment was posted to the wrong customer's account.
6. The client failed to record a sale.
7. The payment was in transit at the confirmation date.
8. Freight was charged to the customer when the terms were FOB destination.
9. The customer subtracted a cash discount for a payment made after the discount period. The client decided to give credit for the discount taken.

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Solution Preview

Differences that affect the customers' account balances are true in statements 1, 2, 3, 4, 5, 6, 7, 8, 9.
Differences that affect pretax income are true in statements 1, 3, 4, 6, 7, 8, 9.

See notes following for possible alternative interpretation of statements 7 and 9.

1. Using the wrong trade discount changes the amount of the receipts and therefore changes net sales. It also affects the balance in the customer account.

2. Sales tax collected from a customer is reported as a liability to the taxing ...

Solution Summary

In a 348 word solution, each situation is explained in a sentence or two.

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Multiple Choice Auditing questions (annual vacations, misstatements in the expenditure cycle, and more...)

I need help with these multiple choice on Auditing...


1. The audit objective, "The accounts receivable balance represents gross claims on customers and agrees with the sum of the accounts receivable subsidiary ledger" is derived from the assertion of:
a. existence or occurrence.
b. completeness.
c. rights and obligations.
d. valuation or allocation.
e. presentation or disclosure.

2. A company policy states that annual vacations are mandatory for all employees. This policy is most important for employees who:
a. are not bonded.
b. handle cash receipts.
c. maintain the detailed accounting records.
d. have access to the general ledger.
e. serve as inventory clerks.

3. When the positive form of accounts receivable confirmation is used and no response is received, the auditor should normally:
a. assume the account is in error.
b. assume the account is correct.
c. send a second request.
d. send a negative confirmation.
e. contact the customer by telephone.

4. Factors that may contribute to misstatements in the expenditure cycle assertions include all of the following except:
a. there is usually a high volume of transactions.
b. unauthorized purchases and cash disbursements may be made.
c. purchased assets may be appropriated.
d. there may be duplicate payment of vendor's invoices.
e. contentious accounting issues may arise concerning whether a cost should be capitalized or expensed.

5. A trace of the beginning balance for accounts payable to prior year's working papers is a substantive test for:
a. initial procedures.
b. analytical procedures.
c. test of details of transactions.
d. tests of details of balances.
e. presentation and disclosure.

6. In the confirmation of accounts payable, which of the following accounts would be least likely to be selected by the auditor for confirmation?
a. an account with high activity during the year, but a low balance at year end.
b. an account with a vendor who sends a monthly statement.
c. an account with a zero balance.
d. a major vendor used in the prior year, but not in the current year.
e. an account with a debit balance.

7. Observation of inventories is a required audit procedure whenever:
a. inventories are material.
b. inventories are material and it is practicable and reasonable.
c. it is practicable and reasonable.
d. the auditor considers it to be necessary.
e. inventories are material and the auditor considers it to be necessary.

8. During the observation of the inventory, the auditor has no responsibility to:
a. observe the taking of the inventory by client personnel.
b. make some test counts of inventory quantities.
c. supervise the taking of the inventory.
d. make inquiries of the client concerning the inventories.
e. watch for damaged and obsolete inventory items.

9. In companies where inventories are at multiple locations, the auditor's observations ordinarily should include:
a. all inventory locations.
b. a random sample of locations.
c. several inventory locations picked by the auditor.
d. a representative sample of locations.
e. all significant inventory locations.

10. When inventories are material and the auditor does not observe the inventory at or near the year-end, professional standards require the auditor to:
a. thoroughly test the accounting records.
b. observe some physical counts of the inventory.
c. disclaim an opinion on the financial statements.
d. resign from the engagement.
e. re-perform the entire inventory count.

11. A company has a policy that all terminated employees must have an "exit interview" with a member of the personnel department, who documents the discussion. This control relates to the:
a. valuation or allocation assertion.
b. completeness assertion.
c. rights and obligations assertion.
d. presentation or disclosure assertion.
e. existence or occurrence assertion.

12. Completed time tickets and clock cards are sent by:
a. personnel to timekeeping.
b. payroll to timekeeping.
c. timekeeping to payroll.
d. timekeeping to personnel, which forwards them to payroll.
e. timekeeping to payroll, which forwards them to personnel.

13. In assessing control risk in the personnel services cycle, of least concern to the auditor is:
a. payments to fictitious employees.
b. payments to actual employees for hours not worked.
c. failure to pay actual employees for hours worked.
d. payment to actual employees at higher than authorized rates.
e. payments to actual employees for hours worked.

14. Which one of the following is an investing activity?
a. acquiring debt
b. capital leases
c. selling land
d. issuing bonds
e. issuing preferred stock

15. The auditor will normally find evidence concerning the proper authorization of
transactions in the financing cycle by:
a. direct confirmation by the investors.
b. inquiring of the audit committee.
c. inquiring of management.
d. reading the copies of the contracts.
e. reading the minutes of the board of directors meetings.

16. The company officer who is assigned the authority and responsibility for investing transactions should have all of the following characteristics except:
a. is of unquestioned integrity.
b. possesses the knowledge and skills required of a person charged with executing such transactions.
c. has the ability to understand the auditor's procedures relating to investing transactions.
d. realizes the importance of observing all prescribed control procedures.
e. can assist other participating members of management in making initial and ongoing assessments of risks associated with individual investments.

17. Which of the following is correct concerning the inspecting and counting of securities on hand?
a. All securities should be controlled by the auditor until the count is completed.
b. The custodian need not be present during the count.
c. A receipt should be provided by the auditor to the custodian when the securities are returned.
d. The auditor should observe the broker's advice number on the document.
e. The auditor should observe the name of the broker.

18. The control of all funds during the count of cash on hand is meant primarily to prevent:
a. transfers by the client.
b. any chance of double counting.
c. unauthorized disbursements.
d. client personnel from viewing the count procedure.
e. lapping or kiting by the client.

19. In confirming bank deposits, the auditor need not:
a. send two copies of the standard confirmation to the bank.
b. send requests for accounts with zero balances at the end of the year.
c. have the bank return the original to the client.
d. personally mail the requests.
e. make sure the bank returns the response to him or her directly.

20. The auditor may obtain the year-end bank statement directly from the bank and prepare the reconciliation personally. This step is most likely when:
a. the auditor suspects possible material misstatements.
b. it is impracticable to obtain confirmations.
c. detection risk is set at high.
d. detection risk is set at moderate.
e. detection risk is set at low.

21. When material in amount, a bank overdraft should be treated as a:
a. current asset.
b. current liability.
c. current contra-asset.
d. reduction in current assets.
e. reduction in current liabilities.

22. Which of the following is not among the specific auditing procedures the auditor performs to obtain additional audit evidence?
a. making subsequent events review
b. reading minutes of meetings
c. reviewing evidence concerning litigation, claims, and assessments
d. obtaining client representation letter
e. performing analytical procedures

23. By definition, subsequent events occur between:
a. the interim and balance sheet date.
b. the balance sheet date and the report date.
c. the report date and the date the report is issued.
d. the date the report is approved and the date the report is issued.
e. the balance sheet date and the date the report is issued.

24. Which of the following events in a subsequent period is an example of a type 1 subsequent event?
a. issuance of long-term bonds
b. settlement of warranties in excess of recorded amounts
c. purchase of a business
d. issuance of preferred stock
e. casualty loss resulting from a flood

25. Which of the following events in the subsequent period is an example of a Type 2 subsequent event?
a. realization of recorded year-end receivables at a different amount than recorded
b. settlement of recorded year-end estimated product warranty liabilities at a different amount than recorded
c. purchase of a machine
d. purchase of a business
e. sale of equipment

26. Ordinarily, type 1 subsequent events require:
a. adjustment.
b. adjustment and disclosure.
c. a disclaimer.
d. inclusion as a reportable condition.
e. Disclosure.

27. Ordinarily, type 2 subsequent events require:
a. adjustment.
b. adjustment and disclosure.
c. a disclaimer.
d. inclusion as a reportable condition.
e. disclosure.

28. Which of the following subsequent events is least likely to be discovered by reading the minutes of meetings?
a. a new bond issue authorization
b. the payment of a cash dividend.
c. a treasury stock purchase.
d. the discontinuance of a product line.
e. a major increase in the write-off of receivables.

29. The primary source of information about litigation, claims, and assessments is:
a. the board of directors.
b. the client's attorneys.
c. management.
d. direct confirmation with the other party involved.
e. the audit committee.

30. A lawyer's refusal to respond to a letter of audit inquiry normally requires the auditor to:
a. issue a qualified opinion or a disclaimer of opinion.
b. issue an unqualified opinion with an explanatory paragraph.
c. issue a qualified or adverse opinion.
d. issue a standard three-paragraph unqualified opinion.
e. contact the client's in-house attorney for the relevant information.

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