An auditor is testing the 'Rights and Obligations' assertion for accounts receivable. Which of the following procedures is MOST appropriate?

Answer options:

Sending positive confirmations to customers.

Reviewing loan agreements for indications of factoring or pledging of receivables.

Tracing shipping documents to sales invoices.

Reviewing the allowance for doubtful accounts.

How to approach this question

Rights = Do we own it? Or did we sell/pledge it? Check bank docs.

Full Answer

B.Reviewing loan agreements for indications of factoring or pledging of receivables.✓ Correct

Receivables might exist but be owned by a factor (bank). Reviewing debt agreements and board minutes helps identify pledged assets.

Common mistakes

Thinking confirmations prove rights (they prove the customer owes the money, not necessarily who they owe it to if it was factored without notification).

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