Three of the audit objectives related to accounts receivable of Morris Corporation are:
- Verify the existence of the accounts receivable
- Determine that accounts receivable are valued according to generally accepted accounting principles (GAAP). In this situation, GAAP requires that they be valued at their net realizable value.
- Determine that all required disclosures related to accounts receivable are included on the balance sheet and in the notes to the financial statements.
For each audit objective, identify two substantive tests that would provide evidence to support the objective. Briefly explain how the tests you selected will address the specific objective.
Substantive Tests Perform further audit proceduressubstantive procedures for receivables and revenue. 1. Obtain an aged trial balance of trade accounts receivable and analyses of other accounts receivable and reconcile to ledgers. 2. Obtain analyses of notes receivable and related interest. 3. Inspect notes on hand and confirm those with holders. 4. Confirm receivables with debtors. 5. Review the year-end cutoff of sales transactions. 6. Perform analytical procedures for accounts receivable, notes receivable, and revenue. 7. Review significant year-end sales contracts for unusual terms. 8. Test the valuation of notes receivable, computation of interest income, interest receivable, and amortization of discount or premium. 9. Evaluate the propriety of the client's accounting methods for receivables and revenue. 10. Evaluate accounting estimates related to revenue recognition. 11. Determine the adequacy of the client's allowance for uncollectible accounts. 12. Ascertain whether any receivables have been pledged. 13. Investigate any transactions with or receivables from related parties. 14. Evaluate the business purpose of significant and unusual sales transactions. 15. Evaluate financial statement presentation and disclosure of receivables and revenue. Substantive Tests Perform further audit proceduressubstantive procedures for receivables and revenue. 1. Obtain an aged trial balance of trade accounts receivable and analyses of other accounts receivable and reconcile to ledgers. 2. Obtain analyses of notes receivable and related interest. 3. Inspect notes on hand and confirm those with holders. 4. Confirm receivables with debtors. 5. Review the year-end cutoff of sales transactions. 6. Perform analytical procedures for accounts receivable, notes receivable, and revenue. 7. Review significant year-end sales contracts for unusual terms. 8. Test the valuation of notes receivable, computation of interest income, interest receivable, and amortization of discount or premium. 9. Evaluate the propriety of the client's accounting methods for receivables and revenue. 10. Evaluate accounting estimates related to revenue recognition. 11. Determine the adequacy of the client's allowance for uncollectible accounts. 12. Ascertain whether any receivables have been pledged. 13. Investigate any transactions with or receivables from related parties. 14. Evaluate the business purpose of significant and unusual sales transactions. 15. Evaluate financial statement presentation and disclosure of receivables and revenue
