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Alternative procedures for accounts receivable confirmations

19/11/2021 Client: muhammad11 Deadline: 2 Day

14-29 (Objectives 14-3, 14-5 ) The following are common audit procedures for tests of sales and cash receipts:

1. Examine the sales journal for related-party transactions, notes receivable, and other unusual items.

2. Select a sample of customer orders and trace the document to related shipping documents, sales invoices, and the accounts receivable master file for comparison of name, date, and amount.

3. Examine duplicate sales invoices for an indication that unit selling prices were compared to the approved price list.

4. Examine duplicate sales invoices to determine whether the account classification for sales has been included on the document.

5. Compare the quantity and description of items on duplicate sales invoices with related shipping documents.

6. Perform a proof of cash receipts.

7. Examine a sample of remittance advices for approval of cash discounts.

8. Account for a numerical sequence of remittance advices and determine whether there is a cross-reference mark for each one, indicating that it has been recorded in the cash receipts journal.

9. Trace recorded cash receipts in the accounts receivable master file to the cash receipts journal and compare the customer name, date, and amount of each one.

Required

a. Identify whether each audit procedure is a test of control or a substantive test of transactions.

b. State which transaction-related audit objective(s) each of the audit procedures fulfills.

c. For each test of control in part a., state a substantive test that could be used to determine whether there was a monetary misstatement.

14-33 (Objective 14-3) YourTeam.com is an online retailer of college and professional sports team memorabilia, such as hats, shirts, pennants, and other sports logo products. Consumers select the college or professional team from a pull-down menu on the company’s Web site. For each listed team, the Web site provides a product description, picture, and price for all products sold online. Customers click on the product number of the items they wish to purchase. The following are internal controls YourTeam.com has established for its online sales:

1. Only products shown on the Web site can be purchased online. Other company products not shown on the Web site listing are unavailable for online sale.

2. The online sales system is linked to the perpetual inventory system, which verifies quantities on hand before processing the sale.

3. Before the sale is authorized, YourTeam.com obtains credit card authorization codes electronically from the credit card agency.

4. Online sales are rejected if the customer’s shipping address does not match the credit card’s billing address.

5. Before the sale is finalized, the online screen shows the product name, description, unit price, and total sales price for the online transaction. Customers must click on the Accept or Reject sales button to indicate approval or rejection of the online sale.

6. Once customers approve the online sale, the online sales system generates a Pending Sales file, which is an online data file that is used by warehouse personnel to process shipments. Online sales are not recorded in the sales journal until warehouse personnel enter the bill of lading number and date of shipment into the Pending Sales data file.

Required
a. For each control, identify the transaction-related audit objective(s) being fulfilled if each control is in effect.

b. For each control, describe potential financial misstatements that could occur if the control was not present.

15-29 (Objective 15-7) The following is a partial audit program for the audit of sales transactions.

1. Foot the sales journal for one month and trace the postings to the general ledger.

2. Review the sales journal for any large or unusual transactions.

3. Examine sales order for evidence of credit approval prior to shipment.

4. Vouch entries in sales journal to sales invoice and shipping document.

5. Examine evidence on sales invoice that the prices were agreed to the approved price list.

6. Recompute extensions of price and quantities on the sales invoice.

7. Trace entries in sales journal to entry in accounts receivable master file.

Required
a. Identify which audit procedures can be tested by using attributes sampling.

b. What is the appropriate sampling unit for the tests in part a.?

c. List the attributes for testing in part a.

d. Assume an ARO of 5% and a TER of 6% for tests of controls and 5% for substantive tests of transactions. The EPER for tests of controls is 1.0%, and for substantive tests of transactions it is 0.5%. What is the initial sample size for each attribute?

15-33 (Objectives 15-5, 15-7) Annie Zhao is using attributes sampling in testing controls over sales transactions. She is testing five attributes related to sales invoices using an ARO of 5% (confidence level of 95%), and zero expected deviations for each attribute based on prior experience with the client. Annie has determined that the tolerable exception rate for each attribute is 5%. Using her firm’s audit software, she entered the population size (number of invoices), desired confidence level, TER, and EPER, and determined a sample size of 60 invoices. She used the audit software to select a random sample of invoices and performed the control tests. She found zero deviations for four of the five attributes and concluded that the control can be relied upon for each of those attributes. For the remaining attribute, she found one control deviation. In projecting the sample results to the population for the attribute with one control deviation identified, Annie entered the confidence level, sample size, and one deviation into the audit software sampling module and determined that the computed upper exception rate for the attribute is 7.92%.

Required
a. Explain how Annie should interpret the CUER of 7.92%.

b. What should Annie conclude about the effectiveness of the control attribute with one identified deviation?

c. What are the alternatives for Annie if she concludes the control cannot be relied upon?

d. Assume Annie discusses the deviation with the controller and learns this deviation occurred while a temporary employee was covering for the regular clerk, who was on vacation. Would this information be relevant in determining which of the alternatives in answer c. would be the most appropriate response? What testing and documentation would be needed to conclude this control can be relied upon?

6-24 (Objectives 16-1, 16-2, 16-4) You are responsible for designing the audit of notes receivable for Hickory Appliance Retailers, which sells appliances and electronics to consumers for their homes or small businesses. Hickory Appliance has eight store locations in different cities located in the upper Midwestern part of the United States. One of Hickory’s unique competitive advantages has been its ability to offer more attractive credit terms for appliance purchases for their customers relative to traditional credit cards. Thus, most of their sales involve Hickory-financed purchases by their customers. As part of obtaining an understanding of the client’s business and industry, you learned that some of the stores are located in cities that have recently experienced higher rates of unemployment.

Required
a. Which notes receivable balance-related audit objective(s) might have a high risk of material misstatement?

b. What risks, if any, would you consider to be a significant risk related to notes receivable?

c. How might the number of days receivables outstanding in the current year compare to prior years’?

d. Do you plan to send notes receivable confirmations in the current year? Why or why not?

e. To what extent will confirmations of notes receivable help you assess collectibility of the accounts as of year-end?

16-26 (Objective 16-3) The following misstatements are sometimes found in the sales and collection cycle’s account balances:

1. Several cash receipts were posted to the incorrect customer accounts.

2. A shipment made in the subsequent period is recorded as a current period sale.

3. The allowance for uncollectible accounts is inadequate because of the client’s failure to reflect depressed economic conditions in the allowance.

4. Several accounts receivable are in dispute as a result of claims of defective merchandise.

5. The pledging of accounts receivable to the bank for a loan is not disclosed in the financial statements.

6. Goods were returned for credit on the last day of the fiscal year but the sales return was not recorded until the following fiscal year.

7. Several accounts receivable in the accounts receivable master file are not included in the aged trial balance.

8. One account receivable in the accounts receivable master file is included on the aged trial balance twice.

9. Long-term interest-bearing notes receivable from affiliated companies are included in accounts receivable.

Required
a. For each misstatement, identify the balance-related audit objective to which it pertains.

b. For each misstatement, list an internal control that should prevent it.

c. For each misstatement, list one test of details of balances audit procedure that the auditor can use to detect it.

1. 16-35 (Objective 16-4) In the confirmation of accounts receivable for the Reliable Service Company, 85 positive and no negative confirmations were mailed to customers. This represents 35% of the dollar balance of the total accounts receivable. Second requests were sent for all nonresponses, but there were still 10 customers who did not respond. The decision was made to perform alternative procedures on the 10 unanswered confirmation requests. An assistant is requested to conduct the alternative procedures and report to the senior auditor after he has completed his tests on two accounts. He prepared the following information for the audit files:

Required
1. Confirmation request no. 9

· Customer name — Jolene Milling Co.

· Balance — $3,621 at December 31, 2016

· Subsequent cash receipts per the

· accounts receivable master file: January 15, 2017 — $1,837

· January 29, 2017 — $1,263

· February 6, 2017 — $1,429

2. Confirmation request no. 26

· Customer name — Rosenthal Repair Service

· Balance — $2,500 at December 31, 2016

· Subsequent cash receipts per the

· accounts receivable master file February 9, 2017 — $500

· Sales invoices per the accounts receivable

· master file (I examined the duplicate invoice) September 1, 2016 — $4,200

Required
a. If you are asked to evaluate the adequacy of the sample size, the type of confirmation used, and the percent of accounts confirmed, what additional information will you need?

b. Discuss the need to send second requests and perform alternative procedures for nonresponses.

c. Evaluate the adequacy of the alternative procedures used for verifying the two nonresponses.

17-24 (Objective 17-2 ) You are evaluating the results of a nonstatistical sample of 85 accounts receivable confirmations for the Bohrer Company. Information on the sample and population are included below. Tolerable misstatement for accounts receivable confirmation sampling is $100,000.

The confirmation responses were received without exception, other than the following items:

Required

a. Evaluate each of the confirmation exceptions to determine whether they represent misstatements.

b. Estimate the total amount of misstatement in the accounts receivable population. Ignore sampling risk in the calculation.

c. Is the population acceptable? If not, indicate what follow-up action(s) you consider appropriate in the circumstances.

17-26 (Objective 17-3 ) The accounts receivable population for Jake’s Bookbinding Company follows. This table is the same as Table 17-1 , except that cumulative amounts are included to assist you in completing the problem. The population is smaller than is ordinarily the case for statistical sampling, but an entire population is useful to show how to select PPS samples.

Required
a. Select a random PPS sample of 10 items, using computer software.

b. Select a sample of 10 items using systematic PPS sampling. Use a starting point of 1857. Identify the physical units associated with the sample dollars.

c. Which sample items will always be included in the systematic PPS sample regardless of the starting point? Will that also be true of random PPS sampling?

d. Which method is preferable in terms of ease of selection in this case?

e. Why will an auditor use MUS?

17-27 (Objective 17-3 ) In the audit of Price Seed Company for the year ended September 30, the auditor set a tolerable misstatement of $50,000 at an ARIA of 10%. A PPS sample of 100 was selected from an accounts receivable population that had a recorded balance of $1,975,000. The following table shows the differences uncovered in the confirmation process:

Required

a. Calculate the upper misstatement bound on the basis of the client misstatements in the sample.

b. Is the population acceptable as stated? If not, what options are available to the auditor at this point? Which option should the auditor select? Explain.

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