In the course of his initial examination of the financial statements of Yenitscheri Company, Omar Pishdadian, Sworn Financial Advisor (SFA), the auditor, obtained an understanding of the internal control structure relating to the purchasing, receiving, trade accounts payable and cash disbursement cycles and has decided not to proceed with any tests of controls. Based upon analytical procedures, Pishdadian believes that the trade accounts payable balance on the balance sheet as of December 31, 20X2, may be understated.

Pishdadian requested and obtained a client-prepared trade accounts payable schedule listing the total amount owed to each vendor. Pishdadian ascertains that of the substantial amount of accounts payable outstanding at the close of the period, approximately 75 per cent is owed to six creditors. Pishdadian has requested that he be permitted to confirm the balances owing to these six creditors by communicating with the creditors, but the president of the company is unwilling to approve Pishdadian’s request on the grounds that correspondence in regard to the balances – all of which contain some overdue items – might give rise to demands on the part of the creditors

for immediate payment of the overdue items and thereby embarrass Yenitscheri Company.

Accounts receivable represent a significant portion of the total assets of the company. At the beginning of the audit Pishdadian mailed out positive confirmations on a test basis. Included in his tests were confirmations requested from several Turkish government departments; the confirmation request for this one department was returned, along with the following notation: ‘The Pishdadian confirmation letter is returned herewith without action because the type of information requested cannot be compiled by the office with sufficient accuracy to be of any value’.

Yenitscheri Company does not conduct a complete annual physical count of purchased parts and supplies in its principal warehouse, but uses statistical sampling instead to estimate the year-end inventory. Yenitscheri Company maintains a perpetual inventory record of parts and supplies and believes that statistical sampling is highly effective in determining inventory values and is sufficiently reliable to make a physical count of each item of inventory unnecessary.

Required:

When Pishdadian, SFA, writes up the Completion Memo:

A. What should he discuss in the ‘Critical audit areas’ and ‘Significant Audit Areas’ segments of the Memorandum?

B. You are Pishdadian’s senior auditor. He is running short of time and wants you to write the ‘Accounting Issues’ segment. Write the segment.