Happiness Express, Inc. Case 2.3
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