Question

SBS Ltd is the world’s leading internet-based media services provider. Both OzTV and RockTV invested millions in SBS Ltd. However, accounting scandals and fraud allegations had caused the company’s stock crashing, and forced the company to seek bankruptcy protection in Singapore and Malaysia. You are the auditor for SBS Ltd for the year ended 30 June 2019.

The following information pertains to SBS’s sales and accounts receivable:

The consolidated revenue has increased by 184 percent from the year 2017 to 2019.
Revenue in Singapore, which has a reputation as a difficult market for foreign companies to enter, had increased from $97,000 in the first quarter of 2018 to approximately $59 million in the first quarter of 2019.
In the second quarter of 2019, sales have grown by 104 percent but accounts receivable grew by 128 percent.
The average collection days outstanding has increased from 138 days in 2018 to 160 days for the six-month period ended 30 June 2019.
Required:

a) Based on the above information, explain one (1) assertion for sales that you should be most concerned with.

b) Based on the above information, explain two (2) assertions for accounts receivable that you should be most concerned with.

c) Explain one (1) audit procedure that you should perform in order to verify the assertion identified in (a) for sales and one (1) audit procedure for the assertion identified in (b) for accounts receivable.

Answer 1

a) Accuracy - The accuracy assertion addresses whether amounts and other data relating to recorded transactions and events have been recorded appropriately. Generally accepted accounting principles establish the appropriate method for recording a transaction or event.

b) Function - According to the AICPA - the association for professional CPAs in the United States - during an audit that conforms to generally accepted auditing standards, audit evidence is gathered to verify the assertions made on financial statements. Confirmations are one type of audit evidence an auditor will use to find out if the data being audited is recorded properly. Customers confirm accounts receivable, just as vendors confirm accounts payable data.

Identification - AICPA defines confirmation as the process of obtaining audit evidence from a third party. A confirmation is completed by a reply from a third party verifying or denying assertions made on financial statements. Confirmations of accounts receivable are said to be either negative or positive. A positive confirmation requests that the third party reply whether or not the account balance is correct. A negative confirmation requests that the third party reply only if the account balance in question is incorrect.

c) As an auditor, I must be concerned with accuracy of amounts recorded in sales in SBS Ltd and should confirm with each account receivable to ensure its correctness.