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:

Frustrated

In legal terms, refers to a contract that cannot be fulfilled due to unforeseen circumstances, rendering the obligations impractical or impossible to perform.

Condition Precedent

A condition under which the obligations of a contract will begin; also called “subject-to” clause.

Frustration

Interference with a contract by some outside, unforeseen event that makes performance impossible or essentially different in nature.

Equitable Remedy

A judicial order enforcing a party to act or refrain from acting in a certain way, used when monetary compensation does not suffice to resolve a legal dispute.