help?help?Question on 'Auditing and Assurance Services in Australia'?

Question

10.23 Moderate You are the audit senior assigned to the audit of Chocorama Pty Ltd (C), a manufacturer and wholesaler of chocolate products. Your assistant has performed a positive debtors circularisation of 50 of C debtors, with the following results
1No reply has has been received for eight confirmations.
2 Four debtor confirmation letters have been returned unopened marked'No longer at this address'
3Four confirmations were received indicating that the balance was incorrect. The assistant followed this matter up with the debtors clerk and found that C had issued credit notes after year-end and the balance confirmed by the debtors reflected the details of the credit notes.
Required
Indicate the effect of the above findings on the audit approach, specifically identifying the risk that has been highlighted as a result of the sudit testing performed, and any additional procedures which you consider that your assistant should perform.

Answer 1

1. No reply has has been received for eight confirmations.
This doesn't always mean bad news. Lots of people don't respond to auditors' requests. You just have to do alternative procedures on these 8 non-replies - verify to copy of delivery orders with customers' acknowledgement of receipt on them, vouch to copy of sales invoice and if possible, payments received after the y/e.

2 Four debtor confirmation letters have been returned unopened marked 'No longer at this address'
This may signal non-existent debtors and more care should be exercised. Look at the most recent sales invoices and see if this is the address used. If the sales invoice address was this address and the invoice is still unpaid, it could signal a run-away debtor and a bad debt should be considered.

3 Four confirmations were received indicating that the balance was incorrect. The assistant followed this matter up with the debtors clerk and found that C had issued credit notes after year-end and the balance confirmed by the debtors reflected the details of the credit notes.
The assistant should perform a review of credit notes raised after y/e which relate to sales made before y/e and quantify them. Take the amt to the schedule of unadjusted audit adjustments and then evaluate at the end of the audit whether the adjustment is material enough to put through. You don't put through audit adjustments willy nilly, each time you find an error.

It wasn't stated why the assistant circularised 50. That's 50 out of how many debtors? 100? 500? The method of selection must be justifiable. Were statistical sampling tables used? You must make a judgement call of whether to extend the scope of the circularisation exercise, i.e. whether to request for more confirmations. Look out for suddenly higher sales at y/e. There is a presumption that revenue is overstated.