ABC Stores is a large discount catalog department store chain. The company has recently expanded from 8 to 60 stores by borrowing from several large financial institutions and from a public offering of common stock. A recent investigation has disclosed that ABC materially overstated net income. This was accomplished by understating account payable a recording fictitious supplier credits that further reduced

accounts payable. An SEC investigation was critical of the evidence gathered by ABC's audit firm, John & Peter, in testing account payable and the supplier credits. The following is a description of some of the fictitious supplier credits and unrecorded amounts in account payable, as well as the audit procedure.

1. Banana Advertising Credits - ABC had arrangements with some vendors to share the cost of advertising the vendor's product. The arrangements were usually agreed to in advance by the vendor and supported by evidence of the placing of the advertisements. ABC created a 115-page list of approximately 1,100 vendors, supporting advertising credits of RM300,000. ABC's auditors selected a sample of 5 of the 1,100 items for direct confirmation. One item was confirmed by telephone, one traced to cash receipts, one to a vendor credit memo for part of the

amount and cash receipts differed from the amount on the list, but the auditors did not seek an explanation for the differences because the amount were not material. The rest of the credits were tested by selecting 20 items. Twelve of the items were supported by examining the

advertisements placed, and eight were supported by ABC debit memos charging the vendors for the promotional allowances.

2. Apple Credits - ABC created 28 fictitious credit memos totaling RM257,000 from Apple Distributors, the main supplier of health and beauty aids to ABC. ABC's controller initially told the auditor that the credits were for returned goods, then said they were a volume discount, and

finally stated they were a payment so that ABC would continue to use Apple as a supplier. One of the John & Peter staff auditors concluded that a RM257,000 payment to retain ABC's business was too large to make economic sense. The credit memo indicated that the credits were for

damaged merchandise, volume rebates and advertising allowances. The audit firm requested a confirmation of the credits. In response, John Tom, the president of ABC Stores, placed a call to Brown Marry, the presidents of Apple, and handed the phone to the staff auditor. In fact, the call had been placed to an officer, posing as Marry, orally confirmed the credits. ABC refused to John & Peter to obtain written confirmation supporting the credits. Although the staff auditor doubted the validity of the credits, the audit partner, Mark Jack, accepted the credits based on the credit, telephone confirmation of the credits and oral representations of ABC officers.

3. Orange credits - RM130,000 in credits based on 35 credit memoranda from Orange, Inc., were purportedly for the return of overstocked goods from several ABC stores. A John & Peter staff auditor noted the size of the credit and that the credit memo was dated subsequent to year-end. He further noticed that a sentence on the credit memos from Orange had been obliterated by a felt-tip marker. When held to the light, the account could read that the marked-out sentence read, "Do not post until merchandise received." The staff auditor thereafter called Harold Orange, treasurer of Orange, Inc.,and was informed that the RM130,000 in goods had not been returned and the money was not owed to ABC by Orange. Marry advised Jack, the audit partner, that he had talked to Harold Orange. Claimed had been misunderstood by the staff auditor. Marry told Jack not to have anyone call Orange to verify the amount because of pending litigation between ABC and Orange, Inc.

4. Account payable accrual - John & Peters assigned a senior with experience in the retail area to audit account payable. Although ABC had poor internal control, John & Peter selected of 50 for confirmation of the several thousand vendors who did business with ABC. 27 responses were received, and 21 were reconciled to ABC's records. These tests indicated an unrecorded liability of approximately RM290,000 when projected to the population of account payable. However, the investigation disclosed that ABC's president made telephone calls to some suppliers who had received confirmation requests from John & Peter and told them how to respond the request.

5. John & Peter also performed a purchased cutoff test by vouching account payable invoices received for9 weeks after year-end. The purpose of this test was to identify invoices received after year-end that should have been recorded in account payable. Thirty percent of the sample (RM160,000) was found to relate to the prior year, indicating a potential unrecorded liability of approximately RM500,000. The audit firm and ABC eventually agreed on an adjustment to increase account payable by RM260,000.

Identify deficiencies in the sufficiency and appropriateness of the evidence gathered in the audit of account payable of ABC Stores.

FOR EACH QUESTION HERE IS THE DETAIL OBJECTIVE EACH QUESTION

1. Well organized thinking that reviews major factors affecting client business risk and acceptable risk for this audit.
2. Discussion is very exhaustive, interesting to read, very strong supporting evidences and relevant inherent risks.
3. Explanation is very exhaustive, interesting to read and very strong explanation on ideas, comments, opinions, views and recommendations about significant risks in sales and collection audit cycle process context.
4. Very exhaustive and interesting explanation on
5. Provide four or more important point in conclusion part.