Which of the following situations would least likely increase the auditor’s RMM assessment for Accounts Receivable?

Question

BlackTom AI · Accepted Answer

Understanding the risk factors for Accounts Receivable (AR) in an audit involves considering factors that heighten the chance of misstatement or fraud, which in turn drives a higher risk of material misstatement (RMM).
Option 1: 'There are many accounts that have been unpaid for a significant time.' Prolonged outstanding receivables are a classic indicator of potential collectability issues and aging concerns. This situation typically raises RMM because it suggests higher credit risk, possible revenue cutoff problems, and the need for more extensive procedures to verify collectability and accuracy of aging.
Option 2: 'There are many accounts where no reply was received to a negative form confirmation request sent to the audit client’s customers.' Nonresponses to confirmations are a well-known risk factor; they directly impede the auditor’s ability to verify receivable existence and accuracy. This raises RMM due to increased uncertainty about whether the AR balances are accurate and collectible.
Option 3: 'There are many individual customer Accounts Receivable balances with negative (credit) balances.' Negative balances can be unusual and may indicate credit memos, overpayments, or mispostings. While they require investigation, they do not inherently imply a high likelihood of misstated AR balances across the population. In some systems, negative AR balances are expected or properly supported and can reflect customer overpayments or timely settlements, which might not raise AR risk as strongly as aging, confirmations, or related-party concerns.
Option 4: 'There are many receivables from related party transactions.' Related-party AR is a significant risk area because it can involve non-arm’s-length arrangements, potential for improper recognition, and concealment of related-party obligations. This situation typically increases RMM due to higher susceptibility to management override and bias in measurement.
In summary, while all four scenarios warrant careful scrutiny, the presence of numerous negative (credit) AR balances is the least likely to inherently elevate RMM compared with significant aging (unpaid accounts), nonresponses to confirmations, or related-party receivables, making option 3 the least likely to increase the auditor’s RMM for AR.

ACCT:4100:0001 Fall25 Exam 2- Requires Respondus LockDown Browser

Which of the following situations would least likely increase the auditor’s RMM assessment for Accounts Receivable?

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