Question

You have been assigned to audit the sales and accounts receivable balances of Coppero Engineering Ltd. for the year ended September 30, 2020. Coppero Engineering is a major manufacturer of steel parts and fixtures for other manufacturers in the engineering field. The interim work was undertaken in June 2020 and tests indicated that internal controls over sales and accounts receivable are effective and that therefore control risks are acceptable.

You observe that credit sales are made to a group of 2,500 active customers, located in Canada and the United States. Approximately 30 percent of the customers represent 70 percent of the balances, and although most of these customers are in Canada, a number are also based in the United States, England, and Ireland. The sales made into the United States are invoiced in Canadian dollars and you note that the value of the Canadian dollar has escalated by 30 percent in recent months. The total of the accounts receivable balances at September 30 is $95 million and the current allowance for doubtful accounts is $500,000.

Sales and receipts are recorded on the company's computerized accounting system, which simultaneously updates the accounts receivable balances and sales and cash receipts transactions journals on a daily basis. On a weekly basis, an aged trial balance is generated, which is reviewed by the credit manager for slow-paying accounts. Follow-up action is then taken as necessary. Sales returns and bad debt write-offs are processed and summarized weekly and any write-offs have to be approved by the chief financial officer, based on the recommendations of the credit manager. Documents to support these write-offs are kept on file.

After the end of the reporting period, the rising Canadian dollar and a financial crisis in two of the major American markets have caused some concern for the credit manager, who has recently joined the client after a number of years in the retailing industry. Also, rising interest rates in Canada and a slowing economy have affected sales growth in the Canadian market.

Required

You are asked to prepare an audit program to test Coppero Engineering's year-end accounts receivable. You are required to include in your program specific audit objectives you can test using the audit firm's new generalized audit software package. Your manager is particularly worried about the possible negative effects on the collectibility of accounts receivable because of the American financial crisis, the rising dollar, and the slowing Canadian economy.

Answer 1

Answer:

The audit program to test Coppero Engineering’s year-end accounts receivable would include the following:

• Perform analytical procedures such as comparing current and previous year’s balances and seeking expert advice and credit analyses on what impact (if any) the Asian financial crisis and the rising Canadian dollar are likely to have on major customers in Asia.
• Confirm accounts receivable balances by mail, with concentration on the 30% of customers with 70% of the dollar value balances.
• Where necessary, undertake alternative follow-up procedures, to ensure payment has subsequently been received.
• In relation to the adequacy of doubtful debts, examine evidence of collectability of accounts receivable, by reference to evidence such as the ageing of the accounts receivable, correspondence with customers, credit checks and discussions with the client’s credit manager.
• Specific audit objectives that can be tested using the audit firm’s generalized audit software include:
• Ensuring the totals on the accounts receivable master file agree with the accounts receivable control account in the general ledger
• Extracting a complete listing of accounts receivable balances at year end
• Ensuring the master file is made up of complete and accurate customer records through identifying and printing out listings of customer; records where information in the record is invalid or absent
• Determining whether the aging of the customer’s accounts receivable has been correctly entered onto master file, which would require cross adding the file to ensure the individual aged amounts agree with the total amount owing
• Determining whether the internal control procedure in relation to credit control has been correctly followed by identifying those customers who have exceeded their credit rating limits
• Determining whether the client’s allowance for doubtful debts is adequate by identifying those records with long outstanding balances.