An auditor is testing the 'Existence' of accounts receivable. The auditor sends positive confirmations. A customer responds stating, 'We do not owe this amount because we paid it on December 28.' The auditor verifies that the check was received by the client on January 3. What is the conclusion?

Answer options:

The account receivable is valid at December 31.

The client should have recorded the cash receipt on December 28.

The receivable should be written off.

This represents a cutoff error.

How to approach this question

Analyze the timeline. Dec 31 status: Customer mailed check. Client has not received check. Asset = Receivable (valid).

Full Answer

A.The account receivable is valid at December 31.✓ Correct

The account receivable is valid at December 31.

This is a standard timing difference. The customer considers it paid when mailed, but the client cannot record it until received. At December 31, the receivable validly existed on the client's books.

Common mistakes

Thinking the customer's view ('I paid it') determines the client's accounting immediately.

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