Reference no: EM132497537
Question - You are an audit staff senior and you are going to assign the task to perform tests of controls for sales and collection and test of details of balances for accounts receivable for the four engagements to your audit junior. The four clients are described below:
Company 1 - A Co. is a small-sized grocery store. A Co. is a family-owned company and it is a new client to the audit firm. Based on the preliminary understanding of the internal control of A Co., it is noted that there has not been much segregation of duties within the company due to limited manpower.
Company 2 - B Co. is a medium-sized retailer selling luxury shoes and handbags. Its headquarter is in Indonesia. During this year, B Co, started expanding its business and established a number of shops in various Asia Pacific countries including Thailand and Malaysia. B Co. has been a client of the audit firm for 3 years. Based on the previous audit results, there have been a few internal controls in place and there have been some audit adjustments suggested by the auditor every year. B Co. adjusted its accounting records accordingly. Although B Co. has expanded its business during the year, its sales have not increased as much as expected, partly attributable to the slowdown of economies in the region.
Company 3 - C Co. is a medium-sized manufacturer of machines. It is a family-owned business with some internal controls in place. C Co. has recently changed its auditor and is a new client to the audit firm. Communication with the predecessor auditor reviews that the company management has a practice of refusing to make correction in the books when the predecessor auditor advised him to do so and they had a big quarrel since then. The predecessor auditor also informs you that a few managers, including the manager of the accounting department in C Co. may be involved in a fraud and are being investigated by the police.
Company 4 - D Co. operates a chain of bookstores and has a structured internal control system. It is a new client to the audit firm. However, the results of test of controls review a lot of deviations in the implementation of internal control. The management of D Co, is concerned about the situation and is willing to pay a higher audit fee to check whether the financial statements contain material misstatements.
Required - Devise an evidence mix for the audit of sales and collection cycle for the four clients above with respect to tests of control, substantive tests of transactions, analytical procedures and tests of details of balances. Justify whether extensive amount (E), medium amount (M), small amount of testing (S) or no testing (N) is expected.