1. Identify the primary audit objectives that auditors hope to accomplish by (a) confirming a client’s year-end accounts receivable (b) performing year-end sales cut-off tests.
a) The primary audit objectives of confirming a client’s year-end accounts receivable include occurrence and accuracy of realizable value. Auditors would like to make sure that the transaction generating the accounts receivable actually occurs, and that the receivables are recorded at accurate value for the current reporting period. Usually they will send accounts receivable confirmations to client’s customers directly.
b) The primary audit objectives of performing year-end sales cutoff tests include accuracy and timing, since the purpose of year-end sales cutoff tests is to check whether revenues and/or receivables were recorded in the proper period or not. These tests usually involve a review of a selected sample of sales transactions occurring in the last few days of a fiscal year and the first few days of the following year.
The primary audit objectives that the auditors hope to accomplish by confirming a client’s year-end accounts receivable are existence, completeness, and valuation. By using confirmations, the auditors are hoping that the third party would confirm or deny the stated amount, or add additional comments with the confirmation. By examining the exceptions (which includes the non-repliers), the auditors are accomplishing the existence (client exists), completeness (balances that should be recorded are recorded), and valuation assertion (amount is appropriate). Because the auditors will always have non-repliers, accounts receivable confirmations are likely to be more effective for the existence assertion than for the completeness and valuation assertions (AU330.12). With the sales cutoff, the auditors are primary hoping to achieve an appropriately low level of audit risk related to the completeness and existence assertions for accounts receivable...
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