Problem 13 25 p 446 You have been

Problem 13 -25, p. 446 You have been assigned to the confirmation of aged accounts receivable for the audit of Blank Paper Company Ltd. You have tested the trial balance and selected the accounts for confirmation. Before the confirmation requests are mailed, the controller asks to look at the accounts you intend to confirm in order to determine whether she will permit you to send them. She reviews the list and informs you that she does not want you to confirm six of the accounts on your list. Two of them have credit balances, one has a zero balance, two of the other three have a fairly small balance, and the remaining balance is highly material. The reason she gives is that she feels the confirmations will upset these customers because they are “kind of hard to get along with. ” She does not want the credit balances confirmed because it may encourage the customers to ask for a refund. In addition, the controller asks you to send an additional 20 confirmations to customers she has listed for you. She does this as a means of credit collection for “those who won’t know the difference between a public accountant and a credit collection agency. ” REQUIRED: a. Is it acceptable for the controller to review the list of account you intend to confirm? Discuss. b. Discuss the appropriateness of sending 20 additional confirmations to the customers. c. If the auditor complies with the controller’s request, what additional audit work is required? d. Assuming the auditor complies with all of the controller’s requests, what is the effect on the auditor’s opinion? Accounts Receivable-1

13 -25 Solution a. Yes, it is acceptable for the controller to review the list of accounts the auditor intends to confirm. The confirmations will be sent to the company’s customers, and the auditor must be sensitive to the client’s concern with the treatment of their customers. At the same time, if the client refuses permission to confirm receivables, the auditor must consider the reasonableness of the request. b. The auditor should be willing to perform special procedures that the client requests if the client is in agreement that these procedures may not necessarily be considered within the scope of the auditor’s engagement. In the case of the 20 additional confirmations that the controller requested that the auditor send, the auditor should be willing to send the confirmations; however, these confirmations should not be considered in the evaluation of the results of the accounts receivable confirmation sent by the auditor. It would also be reasonable for the auditor to track the time spent on these confirmations and bill them separately. c. If the auditor complies with the controller’s request to eliminate six of the accounts from the confirmation, the auditor must perform alternative procedures on the six accounts and decide whether or not this omission is significant to the scope of her examination. If the auditor believes that the impact of omitting these accounts is significant, she must qualify the auditor’s report to indicate the restriction of scope imposed by the client. With respect to the additional 20 confirmations, since these are outside the scope of the audit, the auditor could discuss the extent of the alternative procedures conducted with the client. There may not be any additional procedures conducted, but simply mail the confirmations (unless there are significant disputes or other matters that come to light. Then the auditor must consider their impact upon the accounts receivable balance). d. If the restriction with respect to not sending the confirmations is material, a qualified or denial of opinion may be needed, if the alternative procedures do not provide satisfactory evidence. Accounts Receivable-2

Problem 13 -19, p. 443 During his interim audit visit, Charles Ai determined that one of the subsidiary companies of Mega Big Limited had experienced some very serious problems with respect to the credit management and collection of trade accounts receivable. During the first six months of the year, the accounts receivable of this subsidiary had almost doubled, the number of days’ sales in accounts receivable had increased from 39 to 64 days, and bad-debt expense had risen sharply. REQUIRED Prepare an outline of the steps that should be taken to investigate the nature and causes of the credit and collection problems. (Do not consider the possibility of fraud. ) 3

Investigation of credit and collection problems 1. Obtain: • aged accounts receivable trial balances (current date) • analysis of bad-debt expenses • analysis of doubtful accounts 2. Ascertain policies in force. 3. Obtain explanations from credit manager for unfavourable results. 4. Consider the following factors: • economic situation 1. effect of competition 2. sales policies • Identify variances in policies and procedures between subsidiary and parent company. • Method of granting credit: Is there an acceptable credit granting system? • outside sources (such as trade credit agencies) • internal sources payment history • credit limits established • Follow-up on collections: Is there an adequate system for follow-up? 1. invoices and statements mailed promptly 2. aged list of accounts reviewed and old accounts contacted by reminders, advices, correspondence, etc. 1. Are records up-to-date? 2. Check compliance with procedures. 1. Have there been changes? 3. Review status of overdue accounts per aged list of accounts and ascertain whether proper action has been taken. 1. follow-up by credit manager 2. approval of credit on specific sales 3. credit limit exceeded should be cut off 4. explanation of delays in payment 5. perform similar analysis of accounts written off as to causes, by checking original credit approval and follow-up. 4. 4 Determine that current allowance is adequate by reviewing collectibility of overdue accounts.