An auditor is testing the valuation of a client's allowance for doubtful accounts. The auditor reviews the aging of receivables and subsequent cash receipts. This approach is best described as:

Answer options:

Test of controls.

Auditing the accounting estimate.

Dual-purpose test.

Analytical procedure.

How to approach this question

Identify the nature of the account (Allowance = Estimate). Identify the procedure (Substantive testing of the estimate).

Full Answer

B.Auditing the accounting estimate.✓ Correct

The allowance for doubtful accounts is an accounting estimate. The auditor tests it by reviewing the data used (aging) and subsequent events (cash receipts) to determine if the estimate is reasonable. This falls under AU-C 540 Auditing Accounting Estimates.

Common mistakes

Calling it a test of controls (it's substantive).

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