Question

King Companies, Inc. (KCI) is a private company that owns five auto parts stores in urban Los Angeles, California. KCI has gone from two auto parts stores to five stores in the last three years, and it plans continued growth. Eric and Patricia King own the majority of the shares in KCI. Eric is the chairman of the board of directors and CEO of KCI, and Patricia is a director as well as the CFO. Shares not owned by Eric and Patricia are owned by friends and family who helped the Kings get started. Eric started the company with one store after working in an auto parts store. To date, he has funded growth from an inheritance and investments from a few friends. Eric and Patricia are thinking about expanding by opening three to five additional stores in the next few years.

KCI employs 20 full-time staff. These workers are employed in store management, sales, parts delivery, and accounting. About 40% of KCI’s business is retail walk-in business, and the other 60% is made up of regular customers for whom KCI delivers parts to their locations and bills these customers on account.
During peak periods, KCI also uses part-time workers.

As part of gaining an understanding of KCI, you inspect (1) the accounts receivable trial balance that lists amounts owed by each customer and (2) an aging of accounts receivable schedule. One customer, Tire Repair Specialists (TRS), has a large material balance that is more than 90 days past due. You discuss the TRS balance with Jonathan, one of KCI’s accounting staff, and he says there are rumors that TRS is having serious financial difficulty. Jonathan says no adjustment or allowance has been made regarding the TRS account.

You just completed a continuing professional education (CPE) course at your firm, Thornson & Danforth, about audit documentation. AU-C 230 has specific requirements about documenting audit work. In particular, paragraph 9 states:

“In documenting the nature, timing and extent of audit procedures performed, the auditor should record:
a. the identifying characteristics of the specific items or matters tested;
b. who performed the audit work and the date such work was completed; and
c. who reviewed the audit work performed and the date and extent of such review.”

“The auditor shall document discussions of significant findings or issues with management, those charged with governance, and others, including the nature of the significant finding or issues discussed, and when and with whom the discussions took place.”

Describe how you would apply the mandatory requirements of AU-C 230 when documenting your understanding related to the potential bad debt. ??

Answer 1

In this particular case, TRS one of the key customer who has a large material balance outstanding for more than 90 days and further TRS is facing some serious financial liabilities.

As an auditor, we must document the followings:

1. KCI's policies related to Bad-debt and make sure it has been approved by the management.

2. Whether TRS outstanding balance which is more than 90 days qualifies as bad debt as per KCI's policy and required any provision.

3. If provision is required, why none is made and what are the reason for the same.

4. TRS is also going through financial difficulties, obtain management assessment around the same and why no provision were made.

5. Perform analytics and assess materiality related to TRS balance and what will be the impact on the overall financial statement if TRS account became bad-debt.

6. Document with whom from management were discussed and what were discussed along with the conclusion

7.Perform independent analysis of TRS balance and obtain confirmtion. Also, assess TRS financial stability. Identify based on our assessment if any any adjustment needs to be posted by management and communicate to them.

8. Obtain management representation on this matter, whether they are ready to do adjustment or not, if not what is management assessment

9. If management is not willing to do the adjustment and the balances are material for the financial statement, consider qualifying the audit report.