Question

Sharon Gallagher (audit manager), Josh Thomas (audit senior), and Suzie Pickering (audit staff) are discussing the audit of revenues for Cloud 9. They are finalizing their plans for substantive tests. They plan to send positive confirmations at two months prior to yearend, and they will use a service that allows for electronic submission of confirmations by customers.

The book value of gross accounts receivable is $71,622,804.

After discussion, the audit team sets tolerable misstatement at $3,000,000 and decide on a sample size of a 100 accounts to confirm

The audit team selects a sample with a total book value of $4,300,000 and perform the confirmation procedures.

You may assume that except for the instances noted below, you received confirmations from customers that showed no exceptions.

1. Determine the amount of misstatement for each customer listed below. If the situation is deemed not to result in a misstatement, then enter ‘0’
   

Customer No. 00030 disputed the price on stock number 11205, which was priced at $75 per item and should have been priced at $60 per item on 1200 items. Cloud 9 issued a credit memo for $18,000 on January 7, 2023. The book value of the receivable for Customer No. 00030 at December 31, 2022, was $130,500. __________________________________ Customer No. 00158 with a receivable balance of $230,225 on December 31 disputed receivables in the amount of $30,500, as a shipment of shoes was not received until January 2, 2023. Further investigation showed that the customer ordered the goods on December 31, 2022, and they were not counted in inventory when the inventory was taken on that date. The freight carrier came by late in the day and picked up the goods, even though the warehouse was normally shut down for inventory on December 31, 2022. The goods were shipped FOB shipping point. The receivable was paid in full on January 29, 2023. ___________________________________ Customer No. 00651 disputed receivables in the amount of $150,750, as it had been paid on December 30, 2022. The check from Customer No. 00651 was received and deposited by Cloud 9 on January 3, 2023. The book value of the receivable for Customer No. 00651 at December 31, 2022, was $150,750. _______________________________ Customer No. 00850 disputed the balance on the confirmation of $35,700 in its entirety. Further investigation showed that the balance was charged to the wrong customer. Goods were shipped to Customer No. 00580. On January 3, 2023, the error was discovered. A credit memo was issued to Customer No. 00850 and an invoice was sent to Customer No. 00580, which was paid in full on January 27, 2023. _________________________________ No response was received from Customer No. 10141. Goods in the amount of $344,232 were shipped on November 1, 2022. Additional goods in the amount of $131,824 were shipped on December 12, 2022. The receivable balance was $476,056 at December 31, 2022. A review of the cash receipts journal showed that a check for $344,232 was deposited on January 24, 2023. Another check for $131,824 was received on February 1, 2023. _______________________________________ Customer No. 21287 disputed receivables in the amount of $755 claiming that it did not receive a promised 1% discount associated with the first shipment to a new customer. The book value of the receivables for Customer No. 21287 at December 31, 2022 was $75,500. The customer subsequently paid $74,745 on January 29, 2023, and Cloud 9 issued a credit memo in the amount of $755. ________________________________________

2. Determine the total sample net misstatement

__________________________________________

3. Using the ratio method, determine the projected/ estimated total misstatement

            _______________________________________________

4. Draw a conclusion about whether the existence assertion for accounts receivable is presented fairly at December 31, 2022.

Check or circle the correct answer

              Fairly Stated

              Misstated

Answer 1

Audit of Revenue for Cloud 9

Determination of amount of misstatement

The audit team has set a tolerable misstatement at $30,00,000. Tolerable misstatement is the limit set by auditors, below which any deviation from correct value of account balances or statements would not be considered as material misstatement of financial reports. The impact of misstatement has to be considered cumulatively to assess if the same is below or above tolerable limits since though individually a deviation found in a particular line item may be tolerable but total of such instances specially in case of a specifically conspired case of fraud may lead to material misstatement of financial reports.

Assessing each case of customer's balance deviation is discussed below:-

Customer No.	Particulars	Correction Entry to Misstated Accounts	Amount of misstatement (Amount in $)	Impact of profit/(loss)
00030	Credit memo issued on January 7,2023 provide further information and substantiate the over invoicing of stock item number 11205 by $ 18,000. Hence this would amount to misstatement.	Sales A/c (Debit) To Customer No. 00030's A/c (credit)	18,000	(18,000)
00158	Since the goods were sold F.O.B. shipping point they were buyer's responsibility once they left the seller's warehouse. On 31st December 2022, since the goods left from Cloud 9's warehouse the receivable was correctly recorded. (Assuming that the entire difference of $ 2,00,000 is due to this reason.)	-	0	0
00651	Since the check was not received by Cloud 9 as at 31st December 2022, it was rightly not recorded in books of Accounts.	-	0	0
00850	The given instance indicates misstatement due to error of invoicing. Hence this should be corrected in the financial reports.	Customer No. 00580's A/c (Debit) To Customer No. 00850's A/c(credit)	35,700	0
10141	Though no response was received from customer following additional checks have substantiated balance as on 31st December 2022: The goods were shipped before 31st December 2022 the amount receivable as at 31st December 2022 was received entirely on January 24, 2023 and February 1, 2023.	-	0	0
21287	Issuance of credit memo of $755 by Cloud 9 in the month of January further substantiates the trade discount not recorded on 31st December 2022. Hence this can be considered as misstatement.	Sales A/c (Debit) To customer No. 21287's A/c (credit)	755	(755)
	Total misstatement		54,455	(18,755)

Projected total misstatement = (54,455/43,00,000)*71,622,804 = $ 9,07,028 (approx.)

[Calculated as per ratio method of findings of sample testing (misstatement of $ 54,455) on sample value of $ 43,00,000 as against population value of $ 71,622,804]

Since the projected total misstatement is below the tolerable level of $ 30,00,000 as set by the auditors the accounts receivable can be said to be presented fairly as at December 31st, 2022.