The primary objectives that auditors hope to accomplish by confirming a client's year-end accounts receivable is to check certain management assertions such as existence, rights and obligations, and valuation. Confirmations from clients and outside parties related to a transaction. Generally, the auditor sends to the client's customer a confirmation stating the amount owed. The customers are requested to return a statement to the auditor indicating whether they agree with the amount, or providing information about any exceptions. Confirmation from the debtor of the client is regular procedure to support existence assertion. The client's customer`s ability to pay off the debt is valuation assertion.
The primary objective for performing year-end sales cutoff tests is to review year-end purchases, sales, and investment revenue made to ensure that transactions were recorded in the proper accounting period. By performing year-end cutoff test, the auditor's tries to test completeness or occurrence assertion; depending on the direction of testing. The auditor should look very carefully at the year-end transaction especially if it is substantial and complex. The auditor should select credit (debit) memoranda for periods before and after the cutoff date, examine the related records of returns and claims from customers to determine that the credit (debit) memoranda are recorded in the proper period.
Coopers & Lybrand did some mistakes in its effort to confirm the Wow Wee receivable at the end of fiscal year 1995. The auditors ignored the suspicious nature of the large receivable from Wow Wee and West Coast Liquidators that resulted from credit sales recorded by Happiness Express in late fiscal 1995. Happiness Express booked fictitious sales on the final day of fiscal 1995 which Coopers & Lybrand did not notice or tested during their audit. There was another mistake that auditors failed to notice that Wow Wee was a manufacturer of toy for Happiness Express...