Billy Joe Atlas, an experienced senior with a CPA firm, was sent to the hospital with intense chest pains after watching his favorite college football team lose a bowl game on December 31. He was scheduled to be in charge of the January 1 inventory observation of Heave Industries, a maker of specialty wool sweaters. Vincent Whimp, a newly promoted senior with considerably less experience, had to be called in at the last minute to head the inventory observation team, which consisted of himself and two staff persons who had never observed an inventory. On January 2, Vincent prepared an inventory observation memorandum, part of which contained these comments.

Bill Turncoat, Janice Swemish, and I arrived at the manufacturing plant at Heave Industries at 9:00 A.M. after taking a wrong turn at the freeway intersection. When we arrived, Mr. Dandurth, the controller, told us that the count teams had already been working for an hour and that several dozen boxes of sweaters had been counted, packed up, and sent to the docks for shipping the next day. I insisted that he instruct the count teams to unpack the boxes so we could see the contents. After a harsh exchange of words, Mr. Dandurth agreed to break open three boxes and recount the contents. There was some discrepancy between the recounts and the original counts of the reopened boxes. However, we took the recounts as the actual figures and did not look at any more boxes of sweaters sent to the dock.

At 11:00 A.M. Janice told me that she wanted to do something other than watch inventory teams count the sweaters and that members of the team were laughing at her. I asked her why she was not making any test counts, and she indicated that no one had told her to do so. I was extremely annoyed but handed her a sheet of paper and instructed her to begin making some counts.

At 2:00 P.M. I checked with Bill, who seemed very nervous. I asked him if there was any problem, and he said that many of the sweaters being counted were torn or had grease marks on them. I asked Mr. Dandurth whether these sweaters were being excluded from the inventory. He said that they were not because retailers were willing to pay full price for such sweaters since they could hide the blemishes and sell them at full price. This explanation seemed reasonable.

We asked Mr. Dandurth whether prenumbered receiving reports and shipping documents were being used. He said that a prenumbered system was in use for both types of documents but that no cutoff was necessary because nothing was received or shipped for a week before and a week after January 1. We accepted his explanation.

After the inventory observation was completed, we apologized for arriving late and packed up our working papers. In my opinion the inventory count on January 1 was accurate.

Required:

a. Describe the mistakes that were made by the inventory observation team.

b. Draft the inventory observation memorandum that probably would have been written if Billy Joe's favorite football team had won its bowl game.

On January 15, Billy Joe was scheduled to be released from the hospital. But he read in the morning paper that a discovery of an ineligible player on his favorite football team had resulted in forfeiture of all conference games for the previous fall season. He had a relapse and had to be confined again to intensive care. As a result, Vincent became the temporary senior on the audit of Heave Industries.

Vincent obtained a trial balance of accounts payable as of the previous December 31. He asked one of his assistants to prepare accounts payable confirmation requests for the largest amounts on the schedule. The assistant had misplaced the prior-year working papers, so she prepared a confirmation "from scratch," part of which is shown below. She then gave them to Mr. Dandurth for signing and mailing.

Our auditors, Stretch and Co., are now engaged in an examination of our financial statements. In connection therewith, please indicate in the space provided whether the amount shown on this confirmation form is the correct amount owed to you. If the amount is not correct, please indicate the correct amount we owe you.

Required:

c. Describe the mistakes made by Vincent in the confirmation of accounts payable.

d. Draft the above portion of the accounts payable confirmation form that probably would have been written if no player had been declared ineligible on Billy Joe's favorite football team.