ExpertMedium1 markMultiple Choice
CPA · Question 38 · Area III: Performing Procedures
An auditor is testing the valuation of a client's allowance for doubtful accounts. The auditor reviews the aging of receivables and discusses the collectibility of large overdue balances with the credit manager. This approach is best described as:
An auditor is testing the valuation of a client's allowance for doubtful accounts. The auditor reviews the aging of receivables and discusses the collectibility of large overdue balances with the credit manager. This approach is best described as:
Answer options:
A.
Developing an independent expectation.
B.
Auditing the accounting estimate by testing management's process.
C.
Reviewing subsequent events.
D.
Test of controls.
How to approach this question
Three ways to audit estimates: 1. Test Mgmt Process. 2. Develop Independent Expectation. 3. Review Subsequent Events. Reviewing aging/talking to credit manager is testing their process.
Full Answer
B.Auditing the accounting estimate by testing management's process.✓ Correct
AU-C 540 allows three approaches. Reviewing the client's aging and discussing specific accounts is testing the method and data management used to calculate the estimate.
Common mistakes
Confusing testing the process with developing an independent expectation.
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