a) Stages of an account receivables circularization
- Obtain a list of account receivables balances, cast this and agree it to the account
receivables control account total at the end of the year. Ageing of debtors may also be
verified at this time.
- Determine an appropriate sampling method (cumulative monetary amount, valueweighted
selection random, etc.) using materiality for the account receivables balance to
determine the sampling interval or number of debtors to include in the sample.
- Select the balances to be tested, with specific reference to the categories of account
receivables noted below.
- Extract details of each account receivables selected from the ledger and prepare
circularization letters.
- Ask the chief accountant at Seeley (or other responsible official) to sign the letters.
- The auditor posts or faxes the letters to the individual debtors.
b) Methods of collecting audit evidence
i) Inspection
This involves physical examination of supporting accounting documentation, contracts, records
and board of director minutes. It also includes physical examination of the assets. This enables
the auditor to verify the existence but not necessarily- ownership and valuation of assets.
ii) Observation
This involves looking at a process or procedure being performed by others. For instance,
observation of payment of wages and salaries, physical count of inventory or opening of mail.
This helps the auditor to have an assurance whether official procedures are followed.
iii) Inquiry
Inquiry consists of seeking information of knowledgeable person inside or outside the entity. It
may range from formal written inquiry to oral inquiries.-
iv) Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records.
Recalculation may be performed manually or electronically.
v) Re-performance
Re-performance involves the auditor's independent execution of procedures or controls that were
originally performed as part of the entity's internal control.
vi) Analytical review
This involves analysis of significant accounting ratios and trend performance including
investigations of fluctuations that occur between the current financial performance with the
previous one and check whether other information is consistent with such relationship.
For example, the auditor performs vouching to ensure such electricity expense occurred and
whether correct amount was booked. The auditor compares electricity expense of current and last
year to see whether there are fluctuations. If there are huge fluctuations, the auditor may examine
electricity together with rental expense, water expense to find out reasons.
vii) External Confirmation
An external confirmation represents audit evidence obtained by the auditor as a direct written
response to the auditor from a third party (the confirming party), in paper form, or by electronic
or other medium. External confirmation procedures frequently are relevant when addressing
assertions associated with certain account balances and their elements. However, external
confirmations need not be restricted to account balances only. For example, the auditor may
request confirmation.of the terms of agreements or transactions an entity has with third parties;
the confirmation request may be designed to ask if any modifications have been made to the
agreement and. if so. what the relevant. details .are. External confirmation procedures also are
used to obtain audit evidence about the absence of certain conditions, for example, the absence
of a "side agreement"- that may influence revenue recognition.
Kavungya answered the question on May 14, 2019 at 13:29
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