Essay About Receivable Confirmations And Potential A

Audit Case Study – Professionalism
Texas A&M UniversityIWA 3Research: Professional IssuesBased on your research of the authoritative literature (see Coverage Topics above) do you agree with Joe that you should not investigate these two accounts further?  Why or why not? If you do not agree with Joe, what are your options to avoid subordinating your judgment as required by professional standards?  Your answer to the above should incorporate/discuss the relevant substantive audit procedures for sending and receiving responses to accounts receivable confirmations (Maximum one page, excluding references). Please list the relevant authoritative and non-authoritative sources as discussed on page 7 of the syllabus.Trang Nguyen        Code Name: NG1808ACCT 607 – 600: Seminar in AuditingProfessor: James C. Flagg PhD., CPAPaper Due Date: February 9, 2016IWA 3: Research: Professional IssuePer AU 330, before sending out the confirmation request, the auditor should decide which relevant information be included in the request form that tailor specific audit objectives, and using prior year audit experience is one of the effective approach as mentioned in this case. There are two types of confirmation requests: negative and positive confirmation. In this case, positive confirmation applies for all 50 receivable accounts. One form of positive confirmation specifically stated the receivable amount and require the respondent to indicate whether he/she agrees which the amount stated. Another positive form called blank form, which requires a greater amount of effort from the respondent, where he/she will have to fill in the balance or provide other information. AU 330 also suggests that blank form provides a greater degree of confirmation validity compare to other confirmation methods. Specifically, for account receivable, confirmation is the most effective to verify existence assertion. In addition to confirmation, sales cutoff tests may be performed to achieve low level of audit risk related to account receivable completeness and existence. Based on my research of the authoritative literature, I do not agree with Joe that the two defective accounts should not be investigated further. A/R made up 30% of the total revenue. The potential A/R misstatement was determined using a series of calculations. First, the selected 50 A/R samples included only those customers with balance greater than $100,000. Therefore, the total amount of this sample size is at least $5 million (50 x $100,000), which is 1/3 of the total A/R balance. Besides, even though the case did not specifically mention the amount of the two misstated accounts, they are at least $200,000 (2 x $100,000). So far, the misstatement on A/R account is at least 4% ($200,000/$5 million), not to mention there could be potential errors on the remaining accounts within the testing sample are yet to discover. Hence, audit risk appears to be pretty high in this case and requires further investigation.