Question

11B-3 Keystone Computers & Networks, Inc. (KCN), has 933 accounts receivable, with a total book value of $10,235,457. From that population, Adams, Barnes & Co. (ABC), CPAs, selected a sample of 260 accounts (142 unique accounts) for confirmation for the year ended December 31, 20X5, as illustrated by the working paper on page 503. First and second confirmation requests resulted in replies for all but 10 of those accounts. ABC performed alternative procedures on those 10 accounts and noted no exceptions. Of the replies, five had exceptions as described below (with ABC follow-up):

1. “The balance of $120,000 is incorrect because we paid that amount in full on December 31, 20X5.”Follow-up: An analysis of the cash receipts journal revealed that the checks had been received in the mail on January 9, 20X6.

2. “Of the balance of $30,000, $330 is incorrect because on December 19 we returned a printer to Keystone when we found that we didn’t need it.We ordered it in the middle of November when we had anticipated a need for it.When we received the printer, we realized it was unnecessary and returned it unopened.”Follow-up: An analysis of the transaction revealed that it was received by Keystone on December 31, 20X5, and that the adjustment to the account had been processed on January 2, 20X6.

3. “The balance of $214,000 is correct, and we paid it on January 5, 19X6.”Follow-up: An analysis of the cash receipts journal revealed that the check had been received on January, 10, 20X6.

4. “Of the balance of $130,000, $10,000 is incorrect because it represents goods that we didn’t receive until January 5, 20X6.”Follow-up: Inspection of shipping records reveals that the item was shipped on January 3, 20X6.

5. “Of the account’s $18,000 balance, we paid $17,460 and the $540 (3 percent of the total) remains unpaid because the Keystone salesperson told us that she would be able to obtain a ‘special’ discount beyond normal.”Follow-up: While inspection of the sales agreement indicated no such discount arrangement, discussions with Loren Steele (controller) and Sam Best (president) indicated that the salesperson had inappropriately granted such a discount to the client. On January 15 of 20X6, they processed the discount and credited the account for $540.

Required:   

a.   For each of the five exceptions, determine the account’s proper “audited value."                                                 

b.   Use the probability-proportional-to-size method with your analysis from part (a)to evaluate your sample’s results. The risk of incorrect acceptance is 5 percent.

pg. 503

                                             Audit Plan – Substantive Tests - Accounts Receivable Revenues

Client: Keystone Computers & Networks Inc.

Financial Statement Date: 12/31/X5

                                                                                                                                          Performed by

                                                                        Procedure                                              Initials         Date

1. Obtain an aged trial balance of accounts receivable as of 12/31/X5.                                            1/6/X6

2. Select a sample of customers’ accounts at 12/31/X5 for positive

Confirmation using probability-proportional-to-size sampling based on the

following parameters:

         a. Risk of Incorrect acceptance of 5%.

          b. Tolerable misstatement of $150,000.

          c. Expected misstatement of $20,000.                                                                                1/7/X6

3. Use generalized audit software to:

                a. Foot the master file of accounts receivable at 12/31/X5.                                           2/12/X6

                b. Test the client-prepared aging of accounts receivable.                                              1/7/X6

                c. Select the specific accounts for confirmation.                                                            1/7/X6

4. Mail accounts receivable confirmation requests.                                                                       1/8/X6

5. Send second requests for all unanswered confirmation requests.                                           1/25/X6

6. For confirmation requests to which no reply is received, perform the following

Alternative procedures:

                a. Test items subsequently paid to remittance advices which identify                          2/16/X6

                     the specific invoices paid. If necessary, reconcile the amounts

                     paid to sales invoices and delivery receipts.

                   b. For items not paid, inspect the invoices and delivery receipts for                          2/16/X6

                        the sales transactions making up the account balance.

7. Resolve exceptions noted on the confirmation requests.                                                           2/16/X6

8. Review credit files for customers with accounts receivable above $150,000                            2/16/X6

At 12/31/X5. Investigate any indications of fictitious accounts.

9. Summarize the results of the confirmation procedures.                                                            2/16/X6

10. Review the adequacy of the allowance for uncollectible accounts by

performing the following procedures:

                   a. Review the aged trial balance of accounts receivable with the                               2/13/X6

                        president.

                   b. Review confirmation exceptions for indications of disputed amounts.                     2/13/X6

                   c. Analyze and review trends in the following relationships:

                             (1) Accounts receivable to net sales.                                                                2/13/X6

                             (2) Allowance for bad debts to accounts receivable.                                          2/15/X6

                             (3) bad debt expense to net sales.                                                                    2/15/X6

11. At year-end, review the file of sales invoices that are waiting to be matched

with delivery receipts for any sales transactions that were not executed and,

therefore, should be recorded in the subsequent period.                                                                12/31/X5

12. For all sales recorded in the last week of the year, inspect the related delivery

receipt to determine that the sale occurred before 12/31/X5.                                                           2/12/X6

13. Review credit memoranda for sales returns and allowances through the last day

Fieldwork to determine if an adjustments needed to record the items as of year-end.                    2/13/X6

14. Perform analytical procedures for sales and accounts receivable including

Comparison of the following to prior years and/or industry data:

                    a. Gross profit percentage by month                                                                            2/12/X6

                    b. Sales by month by salesperson.                                                                               2/12/X6

                    c. Accounts receivable turnover.                                                                                   2/16/X6

                    d. Advertising expense as a percentage of sales.                                                         2/16/X6

                    e. Net receivables as a percentage of total current assets.                                           2/16/X6

15. Ascertain whether any accounts have been assigned, pledged, or discounted by

review of agreements and confirmation with banks.                                                                          2/13/X6

16. Ascertain by inquiry whether any accounts are owed by employees or related

Parties such as officers, directors, or shareholders, and:

                     a.Obtain an understanding of the business purpose for the transactions that

                         resulted in the balances.                                                                                           2/16/X6

                     b. Ascertain the amounts involved.                                                                               2/16/X6

                     c. Confirm the balances.                                                                                               1/25/X6

Answer 1