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. Review Alejandro's comments on each of the following five confirmations and determine the best conclusion and/or follow-up procedures for each item. Assume that each confirmation has been signed with the appropriate signature unless otherwise noted.

A) Confirmation Letters

February 1, 2018
Performance Marine Sales, Inc.
1284 River Road
Louisville, Kentucky 40059
Re: Balance at December 31, 2017 - $267,000
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)	$325,000

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

  

Response: We placed an order for $58,000 on December 26, 2017.

Signature	Title
	Date

Alejandro's note to file:

Per discussion with the controller, the order for $58,000 was shipped FOB shipping point on December 30, 2017, and was received by the customer on January 3, 2018. .Therefore, no entry has been made to record the sale in 2017.

B)

February 1, 2018
West Coast Ski Center, Inc.
163 Tide Avenue
Monterey, California 93940
Re: Balance at December 31, 2017 - $414,000
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)	$320,000

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

Response: We made a payment of $94,000 on December 12, 2017.

Signature	Title
	Date

Alejandro's note to file:

  

Per discussion with the controller, the company received the payment of $94,000 on December 15, 2017, and posted it to “Other Income.”

Answer 1

A. As the customer has placed an order worth $ 58,000 on December 26. The same was acknowledged and shipment was made by Aquatic Jet Products Inc on FOB basis (i.e. Free on Board). Once the order is shipped on FOB basis,responsibility of seller end with respect to risk attached with it. Buyer is responsible for subsequent damanges and losses etc. Hence, as per revenue recongition once the risk and reward associated with the consignment has been transferred then it is eligible to recongised as revenue irrespective of its actual delivery of the goods. By shipping goods on FOB basis; Aqautic Jet Products has transferred the risk associated with the consignment. Hence it will should be recongnised as revenue in 2017 irrespective of the matter wether it reached before that or not.

Accordingly adjustment entry to recognised the revenue should be passed.

B. In this scenario, receipt posted to other income is as error of commission i.e. amount has been credited to wrong account and hence there is difference between the customer's book and Aquatic Jet ledger. Recfitcation entry to be passed as follows;

Other Income A/c Dr. $ 94,000

To, West Cost Ski Center A/c Cr. $ 94,000 (Customer A/c)

Once these entry is passed the balance will match with the customer ledger.