A Risk of Material Misstatement in Accounts Receivable Associated with the Allocation

question 93

Multiple Choice

A risk of material misstatement in accounts receivable associated with the allocation balance-related audit objective is that "long-term service revenue is recorded as current revenue or in the wrong period,overstating revenue and accounts receivable." Which of the following tests of detail of balances would respond to this risk?

• A)Read customer contracts and audit the criteria used to allocate revenue to components of the sales contract.
• B)Check cash received after the year end and trace to accounts receivable master file.
• C)Read the notes to the financial statements and compare to audited financial information.
• D)Enquire with management about the process used to make sure that revenue is recorded in the correct period.

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Definitions:

Annullment

A legal procedure that declares a marriage null and void, as if it never legally existed, due to various possible reasons such as fraud or incapacity.

Intimidation

The act of instilling fear in others to force them to do or abstain from doing something against their will.

Voidable

A contract or agreement that is valid until one party decides to cancel or invalidate it due to certain legal deficiencies.

Negligent Misrepresentation

A false statement made carelessly that induces another party to enter into a contract, resulting in harm or damage.