Question

In the audit of accounts receivable at XYZ company (the client), the gross amount (i.e. not including Allowance for doubtful debt) presented on the financial statement is $700,000 which includes customer A ($300,000) and company B ($400,000). The balance of Allowance for doubtful debt account is zero. You are the auditor and you are asked to check the accounts receivable account.

Required: . In a reply, company B informed you that B was in the process of filing for liquidation (i.e. bankrupt) before the financial year-end and B had informed your client of this matter. You have determined that based on the relevant accounting standard your client should have made Allowance for doubtful debt of $400,000 (whole amount) for company B. Given that your client did not make any Allowance for doubtful debt for company B, determine which management assertion is violated (or at risk).

Answer 1

The violated management assertion is "Assertion about Account Balances-Valuation and Allocation"

This assertion states that all the accounts have been verified at correct Values and proper alloaction of allowances and other provisions have been made.

Assertion are those facts which will have to keep in mind by the auditor while audititng the financial statement of any company. These are basic requirements which the Financial statement should include.

In the given case company has not provided the amount for doubtful debt which should have been provided as per applicable Financial Reportin Framework.Non Compliance with the FRF leads to misstatement in financial statement which seems material in the given question, it will lead auditor to make modified opinion on the financial statements.

Please comment for any additional explanation,

Thanks,