• Performance materiality has been established at $5,500.
• Accounts receivable turnover in the industry has been established at 12; Gross profit margin 75%; and inventory turnover 20.
• Audit risk has been assessed at low; control risk for the Sales and Collection cycle has been assessed at low for all objectives.
• All errors found in the previous year by the auditor were corrected before the previous year’s audit was completed. An aging of accounts receivable outstanding at the end of the year is as follows:
Name of customer Total 0-30 days 31-60 days 61-90 days Over 90 days
CrowFlies Bakery Ltd. $6,800 $6,800
Peter Pumpikin Ltd. 12,200 $12,200
Mary-Beth Joe Ltd. 9,400 $5,500 $3,900
Bob Martin Ltd. 3,600 3,600
Seb and Phil’s Ltd. 2,500 2,500
Ubot Taxi Service 1,500 1,500
Frosty Catering Ltd. 4,200 2,100 2,100
Total $40,200 $9,100 $12,100 $6,800 $12,200
Positive confirmations were sent to Seb and Phil’s Ltd, Ubot Taxi and Frosty Catering. Because this represented over ten percent of the population the junior staff auditor concluded that the sample size selected was representative. Seb and Phil’s and Ubot Taxi’s confirmations were returned without error.
Frosty Catering’s confirmation has not been returned. There was no other work performed on Sales, Accounts Receivable or bad debt expense.
A narrative of the system of internal control reveals the following:
Gilian, the only shareholder of the bakery, extends credit to catering customers after she reviews their financial statements. Approximately 70% of the company’s sales are on credit. As long as the financial statements reveal that the company has positive earnings (profit) Gilian is happy to extend credit to them. Sales invoices are prepared on Sunday as Gilian does not have a lot of time during the week. Most of the invoices are for catering of company functions. Gilian provides a proposal to each of her prospective customers after having met with them and determined the type and amount of service that is required. The proposals are generally on a blank piece of paper that she files away in her brief case.
After the function is over she generally remembers what she had originally quoted and manually prepares the invoice. She has a box of pre-numbered invoices that she uses and generally keeps track of all the numbers on the invoices. She does not have a lot of time to phone to follow up on outstanding accounts receivable. Accounting records are updated monthly. They are usually ready for review about 15 days after the month end.
Select information from the company’s financial statements follows:
Sales $275,510 $235,220
Cost of goods sold 82,653 65,862
Bank indebtedness (25,000) (5,000)
Accounts receivable 40,200 19,900
Inventory 65,000 30,000
Bad debt expense 350 150
1. In the table provided, identify three weaknesses in the sales and collections cycle, and for each weakness identified identify the potential impact of the weakness on the client’s business. (Use the following table for your response) (9 marks)
Weakness/Problem Implication/Potential Recommendation for
2. Do you agree with the assessment of control risk? Why or why not? (2 marks)
3. Identify the steps that should be performed to clear Frosty Catering’s confirmation that has not been returned. (3 marks)
4. In the table provided, identify at least one audit procedure that needs to be performed on the year end accounts receivable for each applicable audit objective, such as “existence” (ie. The procedure has not yet been performed) Using case facts identify why you are choosing to perform this procedures. Your procedures should NOT include discussions with Gilian. (10 marks)
Procedure General Audit Objective Why you are performing the
procedure and objective being
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