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:

A) send positive confirmation requests.
B) send negative confirmation requests.
C) examine evidence of subsequent cash receipts instead of sending confirmation requests.
D) use statistical sampling instead of sending confirmation requests.

Answer 1

An auditor is likely to examine evidence of subsequent cash receipts to verify small, effectively controlled accounts receivable balances in a rural cable TV firm, as it is more efficient than sending out confirmations.

Step-by-step explanation:

To determine the existence of accounts receivable balances at the balance sheet date for a cable TV firm with small receivable balances, effective internal control, and monthly billing, an auditor would most likely select option C: examine evidence of subsequent cash receipts instead of sending confirmation requests.

This approach is efficient for several reasons. Since the balances are small and there is a large volume of accounts with effective control, it would be more cost-effective and less time-consuming to verify receipts after the balance sheet date than to send out confirmations. Furthermore, the subsequent cash receipts provide strong evidence that the receivables existed and that they have been paid, reducing the risk of uncollectible accounts.