Question

As part of the fieldwork of an audit engagement, the senior on the audit obtained and documented an understanding of the company's internal control relating to accounts receivable and assessed control risk related to accounts receivable at the maximum level. Alejandro, the staff person assigned to the engagement, requested and obtained from the company an aged accounts receivable schedule listing the total amount owed by each customer as of December 31, 2017, and sent positive confirmation requests to a sample of the company customers. Review Alejandro's comments on each of the following confirmation and determine the best conclusion and/or follow-up procedures for each item. Assume that each confirmation has been signed with the appropriate signature unless otherwise noted.

Confirmation Letters
February 1, 2018
Performance Marine Sales, Inc.
1284 River Road
Louisville, Kentucky 40059
Re: Balance at December 31, 2017 - $267,000
Dear Sirs:
As of December 31, 2017, our records indicate your balance with our company as the amount listed above. Please complete and sign the bottom portion of this letter and return the entire letter to our auditors, JS LLP, PO Box 100, Orlando, Florida 32806.
A stamped, self-addressed envelope is enclosed for your convenience.
Sincerely,
Aquatic Jet Products, Inc.

  

The above balance is	Correct
X	Incorrect (show amount)	$325,000

If incorrect, please provide information that could help to reconcile your account.

  

Response: We placed an order for $58,000 on December 26, 2017.

Signature	Title
	Date

Alejandro's note to file:

Per discussion with the controller, the order for $58,000 was shipped FOB shipping point on December 30, 2017, and was received by the customer on January 3, 2018. .Therefore, no entry has been made to record the sale in 2017.

Answer 1

Goods in transit refers to merchandise and other types of inventory that have left the shipping dock of the seller, but not yet reached the receiving dock of the buyer.If the shipment is designated as freight on board (FOB) destination, ownership transfers to the buyer as soon as the shipment arrives at the buyer. Company should not record sales until goods reaches to customer.

In given scenario, company shipped the goods on 30th December, 2017 and this good recieved by Performance Marine Sales, Inc. on 3rd January,2018. Hence company wrongly recorded sales and liability for goods in transit.

Since this scenario leads to misstatement in financial reports. Hence auditor can qualify the audit report.