Question

Smith Corporation has numerous customers. A customer file is maintained and includes a customer record with a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to:

Option 1: Trace accounts to sales receipts
Option 2: Conduct a surprise physical inventory
Option 3: Examine monthly credit reports
Option 4: Perform a credit limit analysi

Answer 1

The auditor should 4)perform a credit limit analysis to directly compare customer account balances with their credit limits and identify any overages.

Step-by-step explanation:

To determine whether credit limits are being exceeded in Smith Corporation, the best procedure for the auditor to follow would be to perform a credit limit analysis. This involves comparing the account balances of customers against their established credit limits to identify any instances where the credit limit is exceeded. This type of analysis is directly related to the auditor's objective, as opposed to other options such as tracing accounts to sales receipts, conducting a surprise physical inventory, or examining monthly credit reports, which may not provide direct evidence regarding the status of credit limits.