Accounts Receivable Testing: Selecting Sample Size for Audit

Selecting the Right Invoice Threshold for Accounts Receivable Testing

Scenario: You are auditing the accounts receivable of a large airline parts manufacturer. This company primarily sells custom-made parts to a limited number of global clients. The total accounts receivable balance requiring testing is CU4,800,000, and preliminary materiality (PM) is set at CU1,500,000.

Challenge: What invoice selection criteria should you use for your testing?

Options:

• Select all invoices over CU50,000 (untested population: zero)* Select all invoices over CU400,000 (untested population: CU1,600,000)* Select all invoices over CU550,000 (untested population: CU2,400,000)* Select all invoices over CU250,000 (untested population: CU840,000)

Solution:

The most appropriate selection criteria is to select all invoices over CU50,000, resulting in an untested population of zero.

Why?

• Full Coverage: This option guarantees that every invoice exceeding CU50,000 undergoes testing. * Materiality Consideration: With a total accounts receivable balance of CU4,800,000 and a PM of CU1,500,000, testing all invoices above CU50,000 ensures comprehensive coverage within the materiality threshold.* Risk Mitigation: By testing all invoices above CU50,000, you minimize the risk of overlooking potentially material misstatements.

Key Takeaway: Selecting the right invoice threshold for accounts receivable testing is crucial. Consider the total balance, materiality, and potential risks when determining the appropriate selection criteria for your audit.