ACCA Audit and Assurance (F8) Practice Exam

What procedure helps establish the "Rights and Obligations" of receivables?

1. Review invoices for accuracy

2. Examine customer correspondence

3. Make inquiries of management and review loan agreements

4. Review cash receipts after the cut-off date

The correct answer is: Make inquiries of management and review loan agreements

To establish the "Rights and Obligations" of receivables, making inquiries of management and reviewing loan agreements is essential. This procedure provides insight into the legal and contractual relationship between the entity and its customers. By engaging with management, auditors can obtain information on whether the receivables are owned by the entity and whether any obligations exist that could affect the rights to these receivables. Examining loan agreements specifically helps clarify whether any receivables have been pledged as collateral or are involved in any liens, ensuring that the entity has the rightful claim to the receivables reported in the financial statements. In essence, this method establishes a clear understanding of the entity's rights to the receivables by confirming any associated liabilities or restrictions, which is vital for determining the correctness of reported assets. This context directly addresses the concept of "Rights and Obligations," making it the most effective procedure for this area of the audit.