Question

Apollo Shoes, Inc. Cash Lead Schedule						Prepared by
For Year Ended 12/31/2017						Reviewed by
PBC
			(Audited)		Unaudited
			Balance		Balance
Acct #	Account Title		12/31/16		12/31/17
10100	Cash on Hand		$1,987.28		$2,275.23
10200	Regular Checking		$198,116.52		$557,125.92
10300	Payroll Checking		$0.00		$0.00
10400	Savings		$3,044,958.13		$3,645,599.15
---------------	----------------------------------	----	--------------------------------	----	----------------------
			$3,245,061.93		$4,205,000.30

Date: 28 JAN 2018 15:37:42 +0000
From: "Darlene Wardlaw" <[email protected]>
Subject: Audit of Accounts Receivable

We received a number of accounts receivable (and one pre-paid insurance) confirmations that I put on your desk when I stopped by to talk to Samuel Carboy this morning. With the good response rate on the positive confirmations, you can probably start working on A/R now.

While I think of it, you need to prepare a memo (C-2-1) addressing the following issues:

Describe the two forms of accounts receivable confirmation requests that you used and indicate the factors that you considered in determining which type to use.

What “alternative procedures” are you going to use to verify the existence of these accounts and the gross value of the receivables if the customers who receive positive confirmations never reply, even to a second request?

Put the confirmations in the audit documentation (C-2-2, C-2-3, C-2-4, etc.). Address any discrepancies between the client and the customer and propose adjustments as necessary.

It would also be helpful to indicate the payments received by Apollo on the Aged Trial Balance Schedule (C-2). You can get these off of any early January deposits slips. If you get copies from the client, be sure to tie the totals into deposits indicated on the cutoff bank statement received directly from the bank.

Lastly, the allowance for doubtful accounts looks pretty low. A/R goes up, but the allowance goes down? I need a separate audit documentation (C-3) addressing the reasonableness of Apollo’s Allowance for Doubtful Accounts. You can specifically identify troubled accounts, look at subsequent cash collections, look at what Apollo’s competitors do, look at what Apollo has done in the past (bad debt expense as a % of sales, allowance for doubtful accounts as a % of total receivables) to develop your estimate of what should be in the allowance. Also consider current and previous A/R Turnover and Days’ Sales in A/R ratios.

DW

Question is that:   Ensure that the adjusted book balance ties to the Cash Lead Schedule (B-1), and that the balance per bank statement tie to Bank Confirmation (B-3). Explain what you do to achieve this audit objective and your finding (1 point).

Answer 1

Separate audit documentation (C-3) - addressing the reasonableness of Apollo's allowance for doubtful accounts:

• First of all, policy for making provision for doubtful accounts needs to be verified for any change in the current year (if any).
• Based on accounts receivable ageing and subsequent realisations made till date, workings to be verified from which the current year provision hit and balance sheet figure should be coming.
• There are chances that subsequent realisations would have been huge post balance sheet date leading to less amount of doubtful debt provision required and also may be due to sale near the year end is high the balance looks more than PY closing balance as at the balance sheet date

After arriving at audit entries, if any to be passed - revised cash lead schedule to be tied up with the adjusted book balance.

Balances as per direct bank confirmations received should be tied to balances as per bank statement, which in turn should have been reconciled to bank balances as per book - for which reconciling items testing would have to be performed by the team.