Question

Part A: You are the lead auditor for the Zimmer Tree Company, Inc. in Milford, CT. The company has a June 30^thyear end, and the audit team is discussing strategies for confirming year end accounts receivable. The composition of the accounts receivable is as follows:

Total Accounts Receivable (beforeany Allowance for Doubtful Accounts): $ 4,584,600

Aged Composition:

$ 3,667,680		Zero - 30 days
687,690		Thirty -60 days
183,390		Sixty - 90 Days
45,840		Over 90 Days
$ 4,584,600

Of the total accounts receivable, five individual accounts have over $ 250,000, while 80 of the accounts have balances between $ 25,000 and $ 250,000, while the remaining 200 accounts have balances under $ 25,000. To recap, the composition of Zimmer Tree Company, Inc’s accounts receivable:

(1) Over $250,000 – 5 accounts from different customers.

2. Between $25,000 and $250,000 – 80 accounts from different customers.

(3) Less than $25,000 – 200 accounts from different customers.

Zimmer has a separate sales group for its largest "preferred" customers, which are the select group of customers that normally make purchases in excess of $250,000 per year. Other customers are handled by Zimmer’s normal sales staff.

The audit team is debating whether to send all positive confirmation, or some combination of positive and negative confirmations. After some discussion, the team discusses four different confirmation approaches:

A) Positive confirmations on a sample of all 285 accounts.

B) Positive confirmations on all a sample of all accounts over $25,000; negative confirmations on a sample of accounts less than $25,000.

C) Positive confirmations on all 5 accounts over $250,000; positive confirmations on a sample of the accounts between $25,000 and $25,000; negative confirmations on a sample of accounts less than $25,000.

D) Positive confirmations on all 5 accounts over $250,000; negative confirmations on a sample of the accounts less than $250,000.

The audit team has determined that internal control over the sales and accounts receivable cycle is sound for it’s preferred customers. For the “non-preferred” customers, while the controls remain sound, the audit team’s impression is that the sales staff for these customers appears to be a little “stretched.”

Required: Describe the advantages and the disadvantages of positive and negative confirmations. Based on the four choices in (A) through (D) above, which approach would you recommend for confirmations and why you would use that approach.

Part B: You are evaluating the positive confirmations that have been returned. Most have been returned confirming the balances at June 30^th; however, the following four have been returned with these comments:

(A) "This amount was paid on June 30th."

(B) "We received this shipment on July 2nd."

(C) "These goods were returned for credit on June 15th."

(D) "The balance does not reflect our sales discount for paying by July 5th."

Required: Discuss each of the four responses. Which of the following confirmation responses at June 30^thwould cause an audit team the most concern, and why?

Part C:

Answer 1

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