Question

Sharon Gallagher (audit manager), Josh Thomas (audit senior), and Suzie Pickering (audit staff) are discussing the audit of revenues for Cloud 9. They are finalizing their plans for substantive tests. They plan to send positive confirmations at two months prior to yearend, and they will use a service that allows for electronic submission of confirmations by customers. The book value of gross accounts receivable is $71,622,804. After discussion, the audit team sets tolerable misstatement at $3,000,000 and decide on a sample size of a 100 accounts to confirm The audit team selects a sample with a total book value of $4,300,000 and perform the confirmation procedures. You may assume that except for the instances noted below, you received confirmations from customers that showed no exceptions. 1. Determine the amount of misstatement for each customer listed below. If the situation is deemed not to result in a misstatement, then enter ‘0’ A. Customer No. 00030 disputed the price on stock number 11205, which was priced at $75 per item and should have been priced at $60 per item on 1200 items. Cloud 9 issued a credit memo for $18,000 on January 7, 2023. The book value of the receivable for Customer No. 00030 at December 31, 2022, was $130,500. __________________________________ B. Customer No. 00158 with a receivable balance of $230,225 on December 31 disputed receivables in the amount of $30,500, as a shipment of shoes was not received until January 2, 2023. Further investigation showed that the customer ordered the goods on December 31, 2022, and they were not counted in inventory when the inventory was taken on that date. The freight carrier came by late in the day and picked up the goods, even though the warehouse was normally shut down for inventory on December 31, 2022. The goods were shipped FOB shipping point. The receivable was paid in full on January 29, 2022. ___________________________________ C. Customer No. 00651 disputed receivables in the amount of $150,750, as it had been paid on December 30, 2022. The check from Customer No. 00651 was received and deposited by Cloud 9 on January 3, 2022. The book value of the receivable for Customer No. 00651 at December 31, 2022, was $150,750. _______________________________ D. Customer No. 00850 disputed the balance on the confirmation of $35,700 in its entirety. Further investigation showed that the balance was charged to the wrong customer. Goods were shipped to Customer No. 00580. On January 3, 2022, the error was discovered. A credit memo was issued to Customer No. 00850 and an invoice was sent to Customer No. 00580, which was paid in full on January 27, 2022. _________________________________ E. No response was received from Customer No. 10141. Goods in the amount of $344,232 were shipped on November 1, 2022. Additional goods in the amount of $131,824 were shipped on December 12, 2022. The receivable balance was $476,056 at December 31, 2022. A review of the cash receipts journal showed that a check for $344,232 was deposited on January 24, 2022. Another check for $131,824 was received on February 1, 2023. _______________________________________ F. Customer No. 21287 disputed receivables in the amount of $755 claiming that it did not receive a promised 1% discount associated with the first shipment to a new customer. The book value of the receivables for Customer No. 21287 at December 31, 2022 was $75,500. The customer subsequently paid $74,745 on January 29, 2022, and Cloud 9 issued a credit memo in the amount of $755. ________________________________________ 2. Determine the total sample net misstatement __________________________________________ 3. Using the ratio method, determine the projected/ estimated total misstatement _______________________________________________ 4. Draw a conclusion about whether the existence assertion for accounts receivable is presented fairly at December 31, 2022.

Answer 1

Answer to Requirement 1:

Case	Customer No	Amount of misstatement	Justification
A	00030	$18,000	The receivable balance was overstated to the extent of $18,000 due to the error in price tagging stock number 11205 for which a credit note was subsequently issued.
B	00158	$30,500	This is a classic case of revenue inflation on the year end dates wherein the goods were abnormally dispatched late in the day for an order received on the year-end date. Further, it is evident from the inventory records that the goods were not kept aside/intended to be dispatched on December 31, 2022. Cut off procedures are an integral part in detecting these kind of manipulation in the accounts.
C	00651	$150,750	The receivable balance did not account for the check received on December 30,2022. It is an item of Bank Reconciliation statement and should have been considered for the year end balances of accounts receivable.
D	00851	$35,700	Although it did not alter the accounts receivable as a whole as it was a charge for customer '00580, it was a misstatement considering customer '00851 in isolation as he did not owe the company any money.
E	10141	$0	There is no misstatement in this case was revenue was recorded for sale and dispatch before the year end for which the money was subsequently received without any dispute.
F	21287	$755	The misstatement is to the extent of promised 1% discount which was not accounted for in the books.
Total sample net misstatement		$235,705

___________________________________________________________________________________________________

Answer to Requirement 2:

Total sample net misstatement = $235,705 (Refer Requirement 1 for details of amounts included)

Answer to Requirement 3:

Gross receivable	$71,622,804
Tolerable misstatement	$3,000,000
Sample size ($)	$4,300,000
Sample size (Number)	$100

Estimated total misstatement= (Total sample net misstatement/Sample size)*Gross receivable

=($235,705/$4,300,000)*$71,622,804

=$3,926,012

Answer to Requirement 4:

Since the estimated total misstatement($3,926,012) exceeds the tolerable error ($3,000,000), the accounts receivable are not presented fairly at December 31, 2022.