Reference no: EM133073794
Question - You are the in-charge auditor for Mittens Inc., a private company which has been in business for two years. You are currently auditing the revenue and accounts receivable relating to the December 31, 2021 year end (Year 2). The company sells mittens both online via credit cards and to large retailers such as department stores and accessory shops. There are approximately 800 online customers and 30 retail customers.
Last year, there were many errors and adjustments to the financial statements. The management of the company is very focused on growing the company and has not had time to develop controls and procedures. Management does not believe in wasting time and effort to put in controls that they perceive to be administrative and burdensome. In addition employees work significant overtime and have not performed tasks such as cash collections and reconciliations.
Management is struggling to raise debt financing and needs to show good growth and strong financial ratios. The mitten industry is slowing down due to the warmer climate change worldwide and the increase in glove sales. The company have chosen aggressive accounting policies to optimize the company's performance.
You are responsible for auditing the revenue cycle. Details of select GL accounts for the past two years are listed below:
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Year 2 (2021)
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Year 1 (2020)
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Accounts Receivable-Retailers
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$2,450,000
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$1,690,000
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Allowance for Doubtful Accounts
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(625,000)
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(400,000)
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Revenues - Retailers
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$8,030,000
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$7,500,000
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Revenues - Online
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950,000
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1,100,000
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The aging of the Accounts receivable at December 31, 2021 is as follows:
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Current
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$1,950,000
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Aged 60-120 days
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310,000
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Aged 121-179 days
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110,000
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Aged 180-365 days
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52,000
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More than 1 year outstanding
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28,000
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$2,450,00
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A number of the accounts receivables are large balances.
Required -
1. What audit approach would you use to audit the revenue cycle? Justify your response.
2. What type of confirmations (positive or negative) should be used? Provide a rationale for your response based on case facts.
3. Identify four audit procedures to assess the allowance for doubtful accounts at December 31, 2021.