Question

As part of the fieldwork of an audit engagement, the senior on the audit obtained and documented an understanding of the company's internal control relating to accounts receivable and assessed control risk related to accounts receivable at the maximum level. Alejandro, the staff person assigned to the engagement, requested and obtained from the company an aged accounts receivable schedule listing the total amount owed by each customer as of December 31, 2017, and sent positive confirmation requests to a sample of the company customers. Assume that each confirmation has been signed with the appropriate signature unless otherwise noted. Review Alejandro's comments of the confirmation and determine the best conclusion and/or follow-up procedures for each item. Requirement is in bold.

February 1, 2018
Fish & Ski World, Inc.
5660 Ocean Blvd.
Port Arkansas, Texas 78373
Re: Balance at December 31, 2017 - $72,000
Dear Sirs:
As of December 31, 2017, our records indicate your balance with our company as the amount listed above. Please complete and sign the bottom portion of this letter and return the entire letter to our auditors, JS LLP, PO Box 100, Orlando, Florida 32806.
A stamped, self-addressed envelope is enclosed for your convenience.
Sincerely,
Aquatic Jet Products, Inc.

The above balance is	Correct
X	Incorrect (show amount)	$163,000

If incorrect, please provide information that could help to reconcile your account.

  

Response: Per our records, the following invoices are outstanding:
Invoice #4212	$72,000
Invoice #4593	$66,000
Invoice #4738	$25,000

Signature	Title
	Date

Alejandro's note to file:

  

Invoices #4593 and 4738 are not on the A/R aging report at December 31, 2017.

Answer 1

Alejandro has not adequately captured the impact of the mismatch of customer confirmation balance:

Few other conclusions and follow up points can be:

- The break up/ageing of accounts receivable provided was not correct, in which case, the auditor may have to validate the data received from the client again

- Certain payments received from other customers could have been posted to the GL of this customer. This may need further investigation, i.e. ledger scrutiny of the customer, whether the invoices mentioned are appearing in the ledger or not. If these invoice are indeed appearing in the customer ledger, then ascertain the reason for mismatch in balance, most likely, this should be because of wrong reporcding of a receipt from another client

- If the invoices are not posted in the client ledger at all, it would indicate a possibility that certain sale transactions are not posted, which may lead to possibility of misstatement of revenue and inventory. Auditor may want to check certain cut off transactions in both, bank and inventory registers to ensure these aaspects are covered

- Finally, there may be some cut off issues/error at the audit client end or the customers end, for eg. customer paid the money but did not correctly post the transactions in his records. Errors at customer end must be looked into only when all the above steps are complete and the auditor is satisfied that recording in client books is correct