Specialized Construction Equipment, Inc. is an audit client. Thecompany booked a one-hundred-million-dollar credit sale close tothe end of the fiscal year. The sale is material to annual sales,year-end accounts receivable, and annual profits. This particularsale / receivable is being disputed by the customer. The customer'sversion of events, which you have been able to verify, is that thecustomer came to the audit client's place of business to try to buya hundred million dollars' worth of specialized constructionequipment, but the client's salesperson was a sarcastic little twitwho would not answer any of the customer's questions about thespecifications of the equipment. Finally, the customer asked, "CanI get some consideration here?" The client's salesperson answeredthat, no, the customer would not receive any consideration, notbefore, not during, and not after the sale. Then the salespersoncalled over a menacing-looking 275-pound person who told thecustomer to "put your John Hancock" on the order form. The customersaid, "In that case, you can bill it to John Hancock and send it toJohn Hancock." The customer then crossed out the contents of boththe "bill to" and "ship to" blocks and hand-printed "John Hancock"in both. He then signed "John Hancock" at the bottom of the form,rather than his own name or his company's name. The client's lawyerhas represented to your audit firm that there is not any questionthat the customer signed the order; in fact, the customer admitsthat he wrote "John Hancock" in the space designated for asignature. However, later that same day, the customer placed anorder with a different company, and that different company hasalready delivered the equipment.
Required:
a. In general, excluding the situation regarding this particularsale, what internal controls over sales and collections should theclient have in order to be sufficient for you to rely upon in yourperformance of the total audit?
b. In general, excluding the situation regarding this particularsale, what audit steps should you perform to test whether thecontrols over sales and collections do exist and are working?
c. In general, excluding the situation regarding this particularsale, what audit steps should you perform to test whether thebalances of the sales, accounts receivable, bad debts expense, andallowance for bad debts accounts are fairly presented?
Thanks
Specialized Construction Equipment, Inc. is an audit client. Thecompany booked a one-hundred-million-dollar credit sale close tothe end of the fiscal year. The sale is material to annual sales,year-end accounts receivable, and annual profits. This particularsale / receivable is being disputed by the customer. The customer'sversion of events, which you have been able to verify, is that thecustomer came to the audit client's place of business to try to buya hundred million dollars' worth of specialized constructionequipment, but the client's salesperson was a sarcastic little twitwho would not answer any of the customer's questions about thespecifications of the equipment. Finally, the customer asked, "CanI get some consideration here?" The client's salesperson answeredthat, no, the customer would not receive any consideration, notbefore, not during, and not after the sale. Then the salespersoncalled over a menacing-looking 275-pound person who told thecustomer to "put your John Hancock" on the order form. The customersaid, "In that case, you can bill it to John Hancock and send it toJohn Hancock." The customer then crossed out the contents of boththe "bill to" and "ship to" blocks and hand-printed "John Hancock"in both. He then signed "John Hancock" at the bottom of the form,rather than his own name or his company's name. The client's lawyerhas represented to your audit firm that there is not any questionthat the customer signed the order; in fact, the customer admitsthat he wrote "John Hancock" in the space designated for asignature. However, later that same day, the customer placed anorder with a different company, and that different company hasalready delivered the equipment.
Required:
a. In general, excluding the situation regarding this particularsale, what internal controls over sales and collections should theclient have in order to be sufficient for you to rely upon in yourperformance of the total audit?
b. In general, excluding the situation regarding this particularsale, what audit steps should you perform to test whether thecontrols over sales and collections do exist and are working?
c. In general, excluding the situation regarding this particularsale, what audit steps should you perform to test whether thebalances of the sales, accounts receivable, bad debts expense, andallowance for bad debts accounts are fairly presented?
Thanks
