Question

You are the auditor for Drakey Wholesale Products Inc. As part of the audit of accounts receivable, your client has provided you an electronic file representing its accounts receivable as of its fiscal year-end (12/31/2017). The file includes the customer name, customer address, customer number, sales invoice number, sales invoice date, and amount. The total accounts receivable balance is material and historically you have confirmed certain customer accounts with a moderately decent response rate.

Required:

Answer the following questions independently of each other:

1) Will you send confirmations to customers this year and why?

2) If you receive a confirmation back from a customer who indicates that the amount has already been paid... do you consider this an exception in your testing? Why or why not?

3) For any initial confirmation requests that are not returned, list the procedures you would need to complete to achieve the testing objective (get comfort over the assertions).

Answer 1

Please be noted, the responses are both theoritical and practical.

1. First thing, in any audit risk assessment is an iterative process. Just because we have concluded that certain customer accounts are having moderately decent response rate, that might not be true for the current year. Also if it is true for the current year, its good, but External confirmations are best in gathering corroborative evidence to let us assure that the book balance really exists. As it is mentioned that AR(Accounts Receivable) is a material account balance, our audit procedure includes rolling out confirmations to the customers this year.

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2. While you send out confirmations, there are chances that the confirmations return with an exception being made by the customer. There might be two reasons for this.

First being, there may be any stock-in-transit or cash-in-transit as of 12/31 (presuming this is the YE for the client). In this case, we need the client to give us the recomputation of the account balance after adjusting for the stock-in-transit or cash-in-transit and examine the same. If the net balance agrees to the confirmation well and good. No need to do any further procedure.

If its not the above case, we may deem it to be an exception.

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3. The assertions we test for AR by external confirmations are 'Existence and occurrence' and 'Accuracy'. If we don't receive the responses from the customers for the confirmations, we will end up testing the detail by vouching and verifying the transactions in the non-respondent customer accounts to the shipping bills or waybills etc.

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Hope this clarified. Thanks for the opportunity.