Discuss AICPA CPA-Auditing Exam Topic 3 Question 117

A retailing entity uses the Internet to execute and record its purchase transactions. The entity's auditor recognizes that the documentation of details of transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would:

ACompare a sample of paid vendors' invoices to the receiving records at year-end.

BPlan for a large measure of tolerable misstatement in substantive tests.

CPerform tests several times during the year, rather than only at year-end.

DIncrease the sample of transactions to be selected for cutoff tests.
Explanation
Choice 'c' is correct. When an entity transmits, processes, maintains, or accesses significant information electronically, some accounting data and source documents may be available only in electronic form, or only at a certain point in time. The auditor would generally perform tests of controls several times during the year to compensate for this limitation.
Choice 'a' is incorrect. Comparing a sample of paid vendors' invoices to receiving records provides evidence that the company received the goods for which it paid, but only if records are available in sufficient detail to make such a comparison. If detailed records are retained for only a short period of time, such comparisons would need to be performed throughout the year, not just at year-end.
Choice 'b' is incorrect. The auditor's judgment as to an appropriate level of tolerable misstatement is based on considerations of materiality and audit risk. Increasing this level implies that the auditor is willing to accept a larger error, which would not be an appropriate response to the limitation described.
Choice 'd' is incorrect. Increasing the sample size related to cutoff testing will not provide evidence about transactions occurring throughout the period under audit, since cutoff testing relates to year-end.

Suggested Answer: C

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29 comments · newest first

Rosalind 7 months ago

C is definitely the best choice. Continuous testing is essential for accuracy.

Jess 8 months ago

I don't see how option D helps. Cutoff tests are too limited.

Linette 8 months ago

Option B seems risky. Accepting larger errors isn't smart.

Mitsue 8 months ago

I feel like option A could be useful too, but only if records are detailed.

Carlee 8 months ago

Agreed! Year-end tests alone won't cover everything.

Tuyet 8 months ago

Just a reminder, electronic records can vanish fast!

Caprice 8 months ago

I thought increasing sample size (D) would help, but I guess not.

Bong 9 months ago

Wait, only short-term records? That sounds risky!

Jettie 9 months ago

I disagree, I think A could work too if records are kept longer.

Sarah 9 months ago

Comparing invoices to receiving records? Sounds like a lot of work, especially if the records are only around for a short time. I'd rather just do the tests multiple times.

Kiley 9 months ago

Performing tests throughout the year is definitely the way to go. Gotta stay on top of those electronic records before they disappear into the ether!

Delfina 9 months ago

Hmm, I'm not sure about increasing the sample size for cutoff tests. That seems like it would just be a waste of time and resources.

Argelia 9 months ago

The "C" option seems like the way to go. Performing tests several times during the year is a smart move when dealing with electronic records that may not be available for long.

Martina 10 months ago

C is definitely the way to go! More tests throughout the year make sense.

Carli 10 months ago

Agreed, option C is the way to go. The auditor has to be proactive in gathering evidence throughout the year, rather than relying solely on year-end procedures.

Doretha 10 months ago

I think option C makes the most sense. Testing throughout the year is key.

Kayleigh 10 months ago

Haha, can you imagine the auditor just throwing their hands up and saying "Ah, well, we'll just have to accept a larger error"? That's not very reassuring.

Larue 11 months ago

I think the key here is that the auditor needs to adapt their testing approach to compensate for the limited availability of records. Doing more frequent tests during the year seems like the best way to address that limitation.

Glenn 11 months ago

Yeah, that makes sense. Increasing the sample size for cutoff testing wouldn't really help since that's just about the year-end, not the whole period. And adjusting the tolerable misstatement level seems like the wrong approach.

Levi 11 months ago

Okay, let me think this through. Since the detailed transaction records are only available for a short time, the auditor can't just do the year-end comparison of invoices to receiving records. They'll need to perform tests more frequently throughout the year to make sure they're capturing everything.

Margart 11 months ago

This question seems tricky. I'm not sure if I fully understand the implications of the entity's electronic transaction records being retained for only a short period of time.

Alonso 6 months ago

↳ replying to Margart

Exactly! Continuous testing is key with electronic records.

Daniel 7 months ago

↳ replying to Margart

I think testing multiple times helps catch issues early.

Laurel 7 months ago

↳ replying to Margart

It complicates the audit process. We need reliable data!

Noemi 10 months ago

↳ replying to Margart

I find it confusing too. Why keep records for such a short time?

Pete 12 months ago

I thought increasing the sample size for cutoff tests could help, but now I see that it wouldn't really address the issue of limited record retention.

Keena 12 months ago

I practiced a similar question where we had to decide on the best approach for testing controls. I think the answer is definitely about doing tests throughout the year.

Margurite 12 months ago

I’m not entirely sure, but I feel like comparing invoices to receiving records might not work if the records are gone after a short time.

Alease 1 year ago

I remember discussing how electronic records can be tricky since they're only available for a short time. I think performing tests multiple times during the year makes sense.

AICPA CPA-Auditing Exam - Topic 3 Question 117 Discussion