Question

You are out at an audit client's headquarters in the suburbs of Chicago. The client is a retailer with more than 800 stores nationwide, and which has a large credit card operation. Some people claim that the company makes a large percentage of its total profit from its credit operations rather than from its merchandising. The in-charge accountant is telling you that he thinks you are ready to take over the accounts receivable portion of the audit. You have available to you the audit work papers (including the audit program) from last year.

Required: The in-charge accountant wants you to ignore the prior year's working papers and ignore the prior year's audit program.

a. Tell him how you intend to approach the audit.

b. What do you want to test?

c. How will you test it?

Answer 1

Answer:-

(A).Informing the in-charge accountant about the audit approach

While planning and preparing an audit plan for the Company as whole or for specific account balance such as the Accounts Receivable balance in this case, the prior year’s plan and working papers form an important part of such planning. There may have been issues and observations made which may be relevant in the current year. For example, in this case, there may have been long outstanding Receivables balances observed in the prior year which may need a creation of provision for doubtful debts.

Thus, while planning the audit I will take into consideration the prior working papers. Since the client has 800 stores nationwide and also the credit card operations, I will ensure that my audit plan includes thorough control testing and sufficient substantive procedures for both the operations to ensure that the Accounts receivables are accurately recorded.

(B).Testing of accounts receivables

I would like to understand the Revenue cycle for both the streams of Income and determine that the sales are being recorded accurately. I would like to do a detailed Sales analysis, and ensure that the sales and receivables balances are stated accurately.

(C).Steps to test the accounts receivables balance

I would consider the following steps while testing the accounts receivables balance:

• Obtain a total list of Accounts receivables and do a detailed scrutiny of the balances, the ageing report and provision for doubtful debts if any

• Obtaining a confirmation of balance from the customers as a third party evidence is more reliable

• Checking of subsequent cash receipts after the Year end date to ensure balances have been paid afterwards on a timely basis