Accounts Receivable and Sales Memorandum

Team #5
Section 002
Due Date: Thursday, March 23, 2017
     
 Memorandum
           To:    Peer Review File of the Alpine Cupcakes, Inc. Audit for the Year Ending
          December 31, 20X2
           From           Date:   March 23, 2017
           RE:    Accounts Receivable and Sales Module Review

Evaluating the Accounts Receivable Lead Sheet Memo and Related Workpapers

When evaluating if all of the steps associated with the AR.3 audit procedure were performed, we found
that there was no evidence of the auditing team reconciling the amounts on the lead sheet to the trial
balance although it was signed off as completed. The auditing team should include the company’s trial
balance in the work papers for review. We also noted that while the auditing program required the
auditing team to detect any fluctuations greater than 10% of the tolerable misstatement threshold, in
practice only fluctuations greater than 25% of this threshold were detected. This lead to not all
fluctuations required by the audit program to be detected. While this isn’t necessarily a problem if the
auditor used their professional judgment to determine that a higher threshold was acceptable, a note of
the change should have been made and it should be reflected in the audit program. In reviewing the
Accounts Receivable Lead Sheet on workpaper AR.3.2, we found that analytical procedure protocol was
followed. Sales revenues were recorded for prior year balances in 20X1 and current year balances in
20X2. A zero balance was shown in the Allowance for Uncollectable Accounts, because Alpine claims
to have never had an issue collecting their debts. As far as their Accounts Receivable balance goes from
prior year, they have maintained a percentage change under 4% [1.92% to be exact], which is within the
acceptable limit.

We noticed some other issues in the Auditor's notes for the Accounts Receivable Lead Sheet. The first
one could be found in note 1 on workpaper AR.3.2. This footnote lists the restaurants that sold Alpine
Cupcake, Inc. products that generated revenues over $6,000. Smokey’s Barbecue Pit was omitted from
this list under note 1, however in 20X2, they generated $8,460.00 in cupcake revenues. Note 3 on the
same workpaper states that the ratio analysis for AR Turnover and Days Sales Outstanding was within
industry standards. However upon reviewing the industry standards given on workpaper B.3.3, we found
that this was not the case. These ratios also differ greatly from the preliminary ratio analysis that was
performed. The audit team followed up on these analysis with the staff at Alpine due to the large percent
change. The client assured the team that the ratios were within industry standards and the team moved
on. This is a prime example of how word of mouth from the client cannot be considered sufficient
evidence and further evaluation of evidence is needed.

Additionally, in the Cupcake Corporate Sales Analysis, Bon Appetito Restaurants was recorded as
selling cupcakes worth $6,228.00 on workpaper AR.3.3. However, on workpaper AR.3.4, when adding
up the monthly cupcake orders and sales, both total numbers are incorrectly summed up. The 20X2
Invoice Total should actually be $132,043. This number of cupcakes sales actually decreased from 20X1
by 10,740, which is a significant drop. In the grand scheme of things, it didn’t alter the numbers too
much, but it is an important mathematical error to note. Additionally, when looking at the Product
Analysis on workpaper AR.3.2, the 20X1 and 20X2 was overstated by 73,892 cupcakes and 76,105
cupcakes, respectively. The actual amount of cupcake orders for 20X1 and 20X2, as mentioned on
workpaper AR.3.3, should be 579,455 and 606,409, respectively. Additionally, with these changed
numbers, the percent change in total cupcakes between the prior year and the current year should
actually be 3.43% instead, which is under the 4% threshold. Therefore, we don’t have to question the
change in total cupcakes ordered.

Evaluating the Adequacy of the Substantive Audit Work

In evaluating the quality of the auditing teams substantive testing, we first noticed that the audit program
was not followed very closely. The auditor deviated from program in the following ways.

AR.4
 A - No evidence of totals from the aging schedule being traced to the lead sheet
 B - Only one account was selected from each category while the program calls for two

AR.5
 A - The Sandwich Place was selected as one of the five largest accounts when in fact it was one
of the smallest. UC Denver Food Service should have been chosen instead for tests to be
performed on. The audit team chose The Sandwich Place due to an error that caused them to
believe the total balance was $10,000 higher than it actually was.
 D - The audit team did not maintain complete control over the confirmation process due to
sending the letters through the client’s mailroom and due to one of the letters being sent back
directly to the client. This is most likely due to the auditing team not including the prepaid self-
addressed letters that were a control element required by the audit program.   

AR.7
 Only procedure A of step 7 was completed. Everything else has been signed off as complete,
however none of the work is included in the audit documentation. With no evidence otherwise,
we must assume that this work was not actually completed as part of the audit.   

We also noted some other issues related to the client and the audit team's documentation. The first issue
we noted was that Alpine records all transactions and sales at the end of the month, not when they
actually occur. This method of recording transactions should be reviewed in greater detail to determine
whether it complies with GAAP standards. Next, we reviewed the $770.27 misstatement that was
discovered. Although immaterial, if Alpine knew about this misstatement already, as it appears that they
did, then they should have written it off immediately and not waited until 20X3. The tolerable
misstatement threshold is also misstated on the same workpaper AR.4.2 as $3,000 when the actual
threshold was calculated to be $3,700. Another important detail to note is that Alpine does not record an
allowance for uncollectible accounts. While they claim to have never needed one, they currently have
many accounts that are past due and are in the middle of a payment dispute with one of their clients.
These are both elements that could lead to an account being uncollectible. The shipping report on
AR.4.3 notes that a shipment was returned to Alpine due to the cupcakes arriving in poor condition.
There is no evidence of Alpine issuing Denver Bakery Cafe a reimbursement for the goods or sending
any replacements goods. We also noticed a discrepancy in the client's documentation. For one of the
shipments to Buckhead restaurants on AR.4.5, the shipping date differed between the client’s invoice
and shipping document. While this is a minor issue, it should have been discussed with the client to
determine why there was a difference.  

In sending out the accounts receivable confirmations, the audit team chose one of the clients incorrectly
by somehow adding an extra $10,000 to The Sandwich Place’s account even though the audit team uses
the correct amount when sending out the confirmation. This made up number appears on workpaper
AR.5.1 and nowhere else in the audit documentation. In reviewing the work performed, we could not
discover how the audit team came up with this amount. In sending out these confirmations, the audit
team must follow Auditing Standard 2310. Account confirmation is performed to determine the validity
of assertions made by the management team. Professional judgment is used to determine the type and
amount of confirmations to be sent to third parties. Account Receivable confirmations are best used to
test management's assertions of existence and valuation. Maintaining control over this process of
confirmation is important and in our review, we determined that the auditing team did not maintain a
sufficient amount of control when performing these operations. By using the client's mail room and
accepting a letter that was sent to the client directly, there is a high risk of the client interfering with the
process. While all of the amounts appear to be confirmed, the amount to which these confirmations can
be trusted has been greatly diminished. In our professional opinion, we also feel that more confirmations
should have been sent out and that five client confirmations does not provide a sufficient amount of
evidence.
In reviewing the sales cutoff testing procedures, we found an issue relating to a purchase order from
Smokey’s Barbeque Pit that was unaddressed. The purchase order called for cupcakes totaling
$2,860.80, however the invoice total came to $3,532.80. Upon closer examination, we found this
difference was caused by an extra 280 unordered vanilla cupcakes being sent to the customer. The
customer paid the full amount for all of the cupcakes received and the client did not record any
complaints. However this over shipment may demonstrate a possible weakness in the control
environment of the shipping department and this issue should have been discussed with the client. We
also noticed that on the final shipping report to this customer, 35 vanilla cupcakes were reported as
being shipped, however when the auditor calculated the items shipped and tied these amounts to the
shipping invoice, there is no evidence of these 35 cupcakes. No note of this omission was made which
leads us to believe that the audit team failed to notice this difference. Further review should be done to
assure that all of the cupcakes in the shipping report are actually being sent to the customers.
Additionally, the sales journals on AR.6.6 and 6.7 were never signed off as being performed or reviewed
by any members of the audit team. Although these items were signed off as completed in the audit
program, it appears that no actual work was done by the audit team in review these journals and
verifying the amounts. Finally, there was almost no work at all done for workpaper 7.1 which involved
evaluating the allowance for uncollectible accounts. While the client claims to not need an allowance
due to no accounts being uncollectible, the audit team is still responsible for assessing this claim. The
audit team was responsible for evaluating the collectability of significant balances, developing their own
estimate of the allowance for uncollectible accounts, reviewing the 5 largest customer accounts, having a
conversation about any overdue accounts with the credit manager, and perform a ratio analysis based on
the accounts receivable aging. None of this work was done and instead the audit team just accepted the
client’s assertion as correct without testing it at all. This represents a significant control issue for our
firm considering this work was both performed and reviewed by senior members of the auditing team.
The lack of work performed on this part of the audit is most likely due to the audit coming to an end and
the auditing team not having enough time to complete the work. In the future we need to put emphasis
on completing the work in a timely manner and hold our auditors accountable when this doesn’t happen.
The audit program is in place to allow the audit team to manage their time wisely and perform all
necessary work before the end of the audit.

Conclusion

While we did not find any major issues with the work of our auditors that would jeopardize the opinion,
there were several mistakes that should have been caught. We also encourage the auditors to follow the
audit program more closely in the future to provide a framework for the work that must be completed.
All of these steps should be completed to the requirements provided in the program. Finally, it is
necessary to impress upon everyone, but especially our senior auditors, the importance of performing all
of the necessary work for every audit that we do.