Reference no: EM13334772

You are to complete a memo about the REVENUE AND COLLECTION CYCLE. You are to address the following points in your memo.

• What is the revenue and collection cycle?

• In addition to ACCOUNTS RECEIVABLE, what are two other significant accounts related to REVENUE and COLLECTION?

• For ACCOUNTS RECEIVABLE, we often use CONFIRMATION LETTERS. What are the 2 types of confirmation letters (identify them and explain their differences)? Also, what are the relevant assertions we are testing with confirmation letters (should be at least 2)?

CONFIRMATION LETTERS

Say you choose a sample of your clients' A/R customers and send positive confirmation letters. Your sample is 100 of the 500 customers. After the introductions and information for the customer, the letter states:

The balance due THE CLIENT as of 12/31/2012 is
$BALANCE
This balance is correct except as noted below:

SIGNATURE
----------------------------------------------------------------------------------------------------------------------------------------
All 100 letters are returned and 93 had no exceptions. Following are the balances exceptions noted on the other 7 letters (identified by letter number).
Letter 13:
$12,400.
We sent a check in this amount on Dec. 27, 2012.
Letter 22:
$7,300
You know, we have been over and over this. We are supposed to have a 2% discount on all of our purchases. So, we really only owe $7,154
Letter 38:
$22,310
It appears that amount includes items that we returned. The price for what we returned was $3,600 so we should only owe $18,710
Letter 41:
$16,200
CLIENT...what a joke. You know, we ordered that stuff in October. Then, it never shipped and never shipped. Sure, they had their excuses about shortages and one of their suppliers experiencing a factory shut-down. Finally, they sent our product in the middle of December. I may make them wait 2 months before I pay.
Letter 66:
$33,760
Our order came as a split shipment. The bulk of the order, $27,500 worth, was received here on Dec. 22nd. The balance, $6,260 didn't arrive until Jan. 10th. According to the paperwork, it was shipped on January 3, 2013.
Letter 79:
$1,230
This is our first order from CLIENT. Our previous supplier had left us high and dry once too often with shipping delays. However, we are very cautious in our purchasing. We placed this small order on Dec. 5, 2012 with the understanding we have unconditional rights of return for 60 days. If the product moves well, CLIENT may well be our next major supplier.
Letter 87:
$4,560
Per our bankruptcy attorney, we neither confirm nor deny this amount.

FOR MONDAY, the 22nd:
The CLIENT has FOB (Free on Board):Shipping terms (title to product transfers to the customer once CLIENT ships)
For each of the 7 letters, decide if there should be an adjustment to the A/R balance as of 12/31/2012. Support your decision (briefly, why or why not adjust?) and, if adjusting, by how much?

OTHER FACTS:
For the remaining 93 letters, the TOTAL A/R balance is equal to the REPORTED BALANCE of $812,000. Add to this the CONFIRMED balances of the 7 exception letters. This is the AUDITED BALANCE for the SAMPLE of A/R. If you take this as 1/5 (100/500) of the AUDITED BALANCE for all of the A/R, then

1. What is the AUDITED balance in accounts receivable (using a precision interval of +/- $400,000)?

2. If the REPORTED A/R is $4,912,000 then is the A/R materially misstated? If so, by how much?