You are engaged in the annual examination of The Mountainview Corporation, a wholesale office supply business, for

Question:

You are engaged in the annual examination of The Mountainview Corporation, a wholesale office supply business, for the year ended September 30. A review of internal control has revealed substantial weaknesses. You have been assigned to examine the accounts receivable.

The following information is available at September 30:

1. The eneral ledger accounts for accounts receivable and the allowance for doubtful accounts have debit balances of $\$ 780,430$ and $\$ 470$, resputwcly. The total of accounts receivable in the subsidiary ledger is $\$ 768,59.4$

2. In preparing to confirm accounts receivable, you tind that the amounts bary greatly in size and decide upon a three-strata procedure. You will use

(a) negative confirmation requests for accounts of less than $\$ 200$,

(b) pesitise confirmation requests. unrestricted random sampling and the technique of estimation sampling for variables for accounts of $\$ 200$ to $\$ 2.000$, and

(c) positite confirnation requests tor all accounts of $\$ 2.000$ or more 3. Your review of accounts receivable and discussions with the client disclose that the following items are included in the accounts receivable (of both the control and the subsidiary ledgers):

a. Accounts with credit balances total $\$ 1.746$.

b. Receivables from officers total $\$ 8,500$.

c. Advances to emplosees total $\$ 1,411$.

d. Accounts that are delinitely uncollectible total $\$ 1,187$.

4. Uncollectible accounts are estimated to be 0.05 percent of the vear's net credit sales of $\$ 15.7$ million.

5. The confirmations and analysis of the subsidiary ledger pruvide the following information:

a. The 1,270 subsidiary ledger accounts with balances of less than $\$ 200$ total $\$ 120,004$. Twenty-seven confirmations show a net overstatement of $\$ 970$. The client agrees that these errors were made.

b. The 625 subsidiary ledger accounts with balances of $\$ 200$ to $\$ 2000$ total $\$ 559,875$. The following errors were reported in the replies received from the random sample of 50 pusitive confirmation requests (the appropriateness of a sample of 50 items was determined statistically based upon desired levels of precision and reliabilit and investigation established that the customers were correct): image text in transcribed

Subsidiary ledger balances of $\$ 37,280$ were affirmed in the replies to all of the remaining 42 positive confirmation requests.

c. The 28 accounts with balances of $\$ 2,000$ and above cemprise the remainder of the accounts receivable subsidiary ledger. Investigation established that errors existed in five of these accounts and that the net overstatement is $\$ 4.570$.

Recquired:

a. Prepate any journal entry (entries) required (i) to reclassif items which are not trade accounts receivable, (2) to write off uncolle tible accounts and (3) to adjust the allowance for doubtful accounts.

b. Using the arithmetic mean of the sample as a basis, prepare a schedule computing an sstimate of the dollar amount of the middle stratum of accounts recerable at Seplember 30. (Do not compute the standard deviation.)
$\therefore$ Assuming that the net adjustment of accounts receivable computed in part " $a$ " "as $\$ 10,000$ and that the estimate of the middle stratum in part "b" was $\$ 600,000$, prepare a schedule computing an estimate ot total trade accounts receivable at September 30.

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