Question

Smith is engaged in the audit of a cable TV firm that services a rural community. All receivable balances are small, customers are billed monthly, and internal control is effective. To determine the existence of the accounts receivable balances at the balance sheet date, Smith would most likely?

1) send positive confirmation requests
2) send negative confirmation requests
3) examine evidence of subsequent cash receipts instead of sending confirmation requests
4) use statistical sampling instead of sending confirmation requests

Answer 1

When determining the existence of accounts receivable balances at the balance sheet date, Smith would most likely send positive confirmation requests.

Step-by-step explanation:

When determining the existence of accounts receivable balances at the balance sheet date, Smith would most likely send positive confirmation requests.

Positive confirmation requests involve mailing a letter to each customer requesting them to confirm the balance owed. By doing so, Smith can obtain direct confirmation from the customers themselves, providing reliable evidence of the existence of the accounts receivable balances.

The other options are not suitable in this scenario:

1. Sending negative confirmation requests would assume the balances are correct unless the customer responds with a contradiction, which is not ideal for detecting errors or potential fraud.
2. Examining evidence of subsequent cash receipts would only confirm that cash has been received and not necessarily that the accounts receivable balances exist at the balance sheet date.
3. Using statistical sampling would involve randomly selecting a subset of the accounts receivable balances for testing, which may not provide sufficient assurance of their existence at the balance sheet date.