Happiness Express, Inc. Case 2.3

Only available on StudyMode
  • Download(s): 916
  • Published: October 5, 2012
Read full document
Text Preview
CASE 2.3 Happiness Express, Inc.

1. Identify the primary audit objectives that auditors hope to accomplish by (a) confirming a client’s year-end accounts receivable (b) performing year-end sales cut-off tests.

The primary audit objectives that the auditors hope to accomplish by confirming a client’s year-end accounts receivable are existence, completeness, and valuation. By using confirmations, the auditors are hoping that the third party would confirm or deny the stated amount, or add additional comments with the confirmation. By examining the exceptions (which includes the non-repliers), the auditors are accomplishing the existence (client exists), completeness (balances that should be recorded are recorded), and valuation assertion (amount is appropriate). Because the auditors will always have non-repliers, accounts receivable confirmations are likely to be more effective for the existence assertion than for the completeness and valuation assertions (AU330.12). With the sales cutoff, the auditors are primary hoping to achieve an appropriately low level of audit risk related to the completeness and existence assertions for accounts receivable (AU330.09). The auditor may want to achieve the valuation assertion as well for high audit risk clients by examining all significant transactions for a period surrounding the cutoff date (AU 9350 1.02b).

2. Identify and briefly describe any mistakes or errors in judgment that Coopers & Lybrand may have made in its efforts to confirm the Wow Wee receivable at the end of fiscal 1995. In your opinion, did these apparent mistakes or errors in judgment involve “negligence” on the part of the given auditors? Would you characterize the mistakes or errors as “reckless” or “fraudulent”? In each case, justify your answer.

Auditors failed to double-check the fax confirmation. The auditors relied only on the faxed transmission and nothing else. Fax confirmations involve risks because of the difficulty of ascertaining the sources of the responses. To restrict the risks associated with fax confirmations and treat the confirmations as valid audit evidence, the auditor should consider taking certain precautions, such as verifying the source and contents of a fax confirmation with a telephone call to the purported sender. In addition, the auditor should consider requesting the purported sender to mail the original confirmation directly to the auditor (AU330.29). In my opinion, the auditors were negligent because the amount being confirmed was material and failed to take steps to verify the source and contents of the fax transmission. However, in my opinion, the auditors were not reckless. This is because being reckless or fraudulent would involve high degree of disregard for standard procedures. I do not believe that is the case since the auditors did get a confirmation, just not a genuine confirmation. In other words, they tried to do something, but not everything in the confirmation process.

3. Should the Coopers & Lybrand auditors have confirmed the receivable from West Coast Liquidators at the end of fiscal 1995? Why or why not? Should the auditors have included one or more sales to West Coast Liquidators in their year-end sales cutoff tests for fiscal 1995?

Generally if the audit risk is acceptably low and if the West Coast Liquidators somehow is not selected in the random samples of confirmation of receivables, the auditor is not required to confirm the receivable from West Coast Liquidators. This is because we are only taking a “sample” of receivables and not the entire population. However, in this case, the auditor should have known about the several “red flags” that had taken place in the company when performing risk assessment during audit planning and during fieldwork. The auditor is like a “police”; if something smells “fishy”, the auditor has a duty to investigate it. In other words, if the combined assessed level of inherent and control risk over the...
tracking img