Question

Case Study question in Auditing

You are the audit supervisor of Hasel Co, which is a manufacturing company. You are currently planning the audit of trade receivables for the year ended 31 December 20x8. At 31 December, Hasel’s trade receivables balance was $6.500.000. Hasel Co has more than 600 customers, including nine customers owing more than $250.000 each. Tests of control revealed weaknesses in Hasel’s internal control over sales and trade receivables. In prior year audits, confirmations revealed misstatements in several customers’ account balances.

1. Tests of control revealed that there is often a delay between Hasel Co’s delivery of goods to customers and the subsequent raising of sales invoice. Complete the sentence below to describe a test to establish the extend of any understatement of receivables at the year end.

The auditor should compare sales order/ goods despatch notes/ sales invoices/ the sales ledger shortly before/ after the year end with sales order/ goods despatch notes/ sales invoices/ the sales ledger

2. Select the type of confirmation request that should be sent to Hasel Co’s customers with a valid reason for that type of confirmation.

The confirmation request should be negative/ positive because Hasel Co’s customers are expected to ignore the confirmation request/ misstatements were revealed in the prior year/ the risk of material misstatement is high/ there is large number of small balance account

3. After sending confirmations to Hasel Co’s customers, you received a reply from a customer which shows that the outstanding balance is not agreed. Which of the following would be the most appropriate audit procedure to perform following this response?

1. Agree payments included in the customer’s statement to cash received by Hasel Co before the year end
2. Check whether invoices not included in the customer’s statement agree to despatch notes raised before the year end
3. Send a second confirmation request asking the customer to recheck their records
4. Require Hasel Co to adjust the customer’s receivable balance to the amount owed according to the customer

  

4. One of Hasel Co’s customers responds that it cannot confirm the amount owed due to the form in which it keeps its accounting records. Which TWO of the following audit procedured are appropriate to follow up on this response?

1. Confirm cash receipts received from the customer shortly before the year end
2. Send a second confirmation request asking the customer to have their auditor check their records
3. Examine cash receipts received from the customer after the year end
4. Inspect supporting documentation such as the invoice and dispatch note

  

  

5. The managing director of Hasel Co has refused permission to send a direct confirmation request to a major customer selected for that procedure, on the grounds that the customer is ‘a close friend who may take offence at such a request’. What is your next course of action?

1. To substitute the balance selected with another customer’s having similar characteristics to preserve the integrity of the sample
2. To advise that his refusal constitutes a restriction to scope which lead to a qualification of the audit opinion
3. To carry out the confirmation procedures as planned since the auditor’s responsibility is to the shareholders and not the directors
4. To carry out the confirmation procedures on the other balances selected and apply alternative procedures to confirm the balance of this major customer

Answer 1

Hasel Company – Account receivable + Debtors Confirmation + Invoice processing

Case Position – As on 31^st Dec 2018 , hasel trade receivable balance was $ 65,00,000. At present Hasel having 600+ customer and out this major 9 customer havening balance > 250000 each so total balance would be $22,50,000 , so it is covered almost 35% of total OS . Unfortunately noticed that weakness in Internal control system in relates to receivable , balance confirmation etc. Alos identified material misstatement in account receivable balances . Auditor has to do following step while doing audit of account receivable :

1. Trace receivable report to general Ledger –
2. Investigation reconcile item if any at year end . Any high value journal entry need to review by Auditor along with supporting documents
3. Auditor has to review complete control process in relates to Invoice from the account receivable ageing report and compare them to supporting documents to see that they were billed correctly , correct customer , rate etc.
4. Match Invoice to shipping log –This is one of the major checking point for auditor to ensure that sales has been recorded correctly . This can be included examination of Invoices issue after the period being audited to see if they should have been included in prior period .
5. Confirm account receivable balance –This is primarily for larger account balance but may include a few random customers having smaller outstanding Invoices
6. Review credit memo –the auditor will review a selection of the credit memos issued during the audit period to see if they were properly authorised , whether they were issued in the correct period.
7. Trend analysis – Auditor has to do trend analysis of sales and account receivable

After sending confirmations to Hasel Co customer , Auditor received a reply from a customer which shows that the outstanding balance is not agreed – In this situation , Auditor has to look into following :

1. Investigate subsequent cash receipts to see if customers have paid for those Invoices that were not confirmed

One of Hasel Co’s customers responds that it cannot confirm the amount owed due to the form in which it keeps its accounting records. Which TWO of the following audit procedured are appropriate to follow up on this response? – In this case auditor should go with following

1. Confirm cash receipts received from the customers shortly before the year end .

d) Inspect supporting documentation such as Invoices and dispatch notes

The managing director of Hasel Co has refused permission to send a direct confirmation request to a major customer selected for that procedure, on the grounds that the customer is ‘a close friend who may take offence at such a request’. What is your next course of action? Auditor should highlight that

Point number b) that his refusal constitutes a restriction to scope which lead to a qualification of the audit report .

c) To carry out the confirmation procedures as planned since the auditor’s responsibility is to the shareholders and not the directors

Balance confirmation auditing procedure help Auditor to check completeness of account receivable balances mainly high value amount .Audit confirmation letter is a specific type of inquiry. It is the process of obtaining a representation of information or of an existing condition directly from a third party. The reliability of evidence obtained through confirmation is directly affected by following factor such as :

1. Prior experience with customer
2. The nature of information being confirmed
3. It exists in documentary form , whether paper , electronic form etc.

ISA 330 , 240 and 500 indicates that external confirmation procedures may assist the auditor to obtain audit evidence with high level of reliability . Auditor needs to find out any significant material misstatement, any fraud or error etc.