Question

In: Accounting

Auditing the Revenue Process You have been assigned to the first audit of the Black Clover...

Auditing the Revenue Process

You have been assigned to the first audit of the Black Clover company for the year ending March 31, 2019. Accounts receivable were confirmed on December 31, 2018, and at that date, the receivables consisted of approximately 200 accounts with balances totaling $956,750. Fifty of these accounts, with balances totaling $650,725, were selected for confirmation. All but 10 of the confirmation requests have been returned; 24 were returned without any exceptions, 6 had minor differences that have been cleared satisfactorily, and 10 confirmations had the following information and comments:

  1. We are sorry, but we cannot answer your request for confirmation of our account as the Kingdom Company uses an accounts payable voucher system and can only confirm individual invoices.
  2. The balance of $1,050 was paid on December 28, 2018.
  3. The balance of $7,750 was paid on January 5, 2019.
  4. The balance of $2,975 was paid on December 13, 2018.
  5. We do not owe you anything on December 31, 2018, as the goods, represented by your invoice date December 30, 2018, number 25050, in the amount of $11,550, were received on January 5, 2019, on FOB destination terms.
  6. An advance payment of $2,500 made by us in November 2018 should cover the two invoices totaling $1,350 shown on the statement attached.
  7. This confirmation was returned as undeliverable by the post office.
  8. We are contesting the propriety of this $12,525 charge. We think the charge is excessive.
  9. We do not owe this balance as our agreement with the company allows us to return any unsold goods without penalty. Amount okay. As the goods have been shipped to us on consignment, we will remit payment upon selling the goods.
  10. Your credit memo dated December 5, 2018, in the amount of $440 cancels the balance above.

Required

  1. Indicate which of these confirmation responses likely represent timing differences
  2. Which of the 10 confirmation repossess likely represents a misstatement? Explain why the response indicates a misstatement.
  3. For each of the 10 confirmation responses, indicate the procedures you would perform to determine whether the exception is a misstatement or has been appropriately recorded by the client.

Solutions

Expert Solution

a.The 24 responses that were returned without any exceptions, 6 with minor differences that have been cleared satisfactorily might have a timing difference unless they specifically mention balance as on date 31st March 2019.

b.A significant and important audit activity is to contact customers directly and ask them to confirm the amounts of unpaid accounts receivable as of the end of the reporting period under audit. This should necessarily be done for all significant account balances as at the period- end while certain random customers having smaller outstanding invoices should also be selected. The trade receivables may be requested to confirm the balances either (a) as at the date of the balance sheet, or (b) as at any other selected date which is reasonably close to the date of the balance sheet. The date should be decided by the auditor in consultation with the Company.If the balance confirmation is not seeked for balance sheet date or specified date there may be chances of relying of confirmation leading to material misstatement.

c.The form of requesting confirmation from the trade receivables may be either (a) the ‘positive’ form of request, wherein the trade receivable is requested to respond whether or not he is in agreement with the balance shown, or (b) the ‘negative’ form of request wherein the trade receivable is requested to respond only if he disagrees with the balance shown. The use of the positive form is preferable.when individual account balances are relatively large, or where the internal controls are weak, or where the auditor has reasons to believe that there may be a substantial number of accounts in dispute or inaccuracies or irregularities. The negative form is useful when internal controls are considered to be effective, or when a large number of small balances are involved, or when the auditor has no reason to believe that the trade receivables are unlikely to respond. If the negative rather than the positive form of confirmation is used, the number of requests sent and the extent of the other auditing procedures to be performed should normally be greater so as to enable the auditor to obtain the same degree of assurance with respect to the trade receivable balances. In many situations, it may be appropriate to use the positive form for trade receivables with large balances and the negative form for trade receivables with small balances.l The method of selection of the trade receivables to be circularised should not be revealed to the Company until the trial balance of the trade receivables’ ledger is handed over to the auditor. A list of trade receivables selected for confirmation should be given to the entity for preparing request letters for confirmation which should be properly addressed and auditor should insert an identification mark, example- a team member inserting his initials in the letter (without informing the Company) to enable the auditor to continue to maintain unpredictability in audit and to avoid any wrong doing from management side. The auditor should maintain strict control to ensure the correctness and proper despatch of request letters In the alternative, the auditor may request the client to furnish duly authorised confirmation letters and the auditor may fill in the names, addresses and the amounts relating to trade receivables selected by him and mail the letters directly. It should be ensured that confirmations as well as any undelivered letters are returned to the auditor and not to the client.


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