An auditor is performing a 'test of details' on the existence of accounts receivable. The auditor sends positive confirmations. A customer responds stating, 'We do not owe this amount; we paid it on December 28.' The auditor verifies that the check was received by the client on January 3 and recorded then. The year-end is December 31. This finding represents:

Answer options:

A cutoff misstatement requiring adjustment.

A misappropriation of assets.

A timing difference, not a misstatement.

A kiting scheme.

How to approach this question

Analyze the timeline. If the client received cash Jan 3, they were right to show AR on Dec 31.

Full Answer

C.A timing difference, not a misstatement.✓ Correct

A timing difference, not a misstatement.

This is a classic timing difference. The customer paid (mailed check) in Year 1, but the client received it in Year 2. On Dec 31, the client did not have the cash, so the Receivable was correctly listed on the Balance Sheet. No adjustment is needed (unless terms were FOB destination and goods were in transit, but this is a cash receipt issue).

Common mistakes

Assuming every confirmation exception is an error.

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