Assume that you are auditing sales and accounts receivable in the 3rd year of your audit of Mt. Hood Furniture, a privately held company. You know the following from your audit planning procedures.

Management has been very conscious about reporting accurate earnings.

The company now has stable management and the company has retained competent accounting

personnel.

The CFO implemented a new computerized accounting system last year.

Tests of controls in the

prior year show that programmed controls were effectively designed and

that they operated effectively.

Mt. Hood has kept an emphasis on growing sales and the company has approved sales to

customers with higher credit risks. This was done with the knowledge of the board of directors.

Increasing competition from new entrants into the retail office furniture business has been

negatively impacting the financial position of Mt. Hood's customers.Management continues to receive significant bonuses based on sale

volume.

The CFO reviews the allowance for doubtful accounts and other estimates

quarterly.

Sales returns have been immaterial.

The Company has strong controls over cash receipts.

The Company has placed in operation the following programmed control

activities:

o The amount of the purchase plus the customer's accounts receivable

balances is

compared with the customer's credit limit before a sales order is

approved.

o All goods pulled from inventory are matched with approved sales order

information.

o Quantities on every sales invoice are checked against shipping information

and prices are

checked against the master price file. Exceptions are printed on an exception report and

the transactions are held in a suspense file for follow-up. Manual follow-up procedures

appear to be effective based on a system walk through.

o The computer compares the date on the sale invoice with the date on

shipping records.

o The computer matches every sales invoice with an underlying bill of lading,

and then it cancels the bill of lading so that it cannot be matched with another

sales invoice.

o The computer checks run-to-run totals of beginning AR balances, plus sales,

minus cash

receipts with ending AR balances.

o The company generates an aging of accounts receivable monthly.

o Any exceptions to the computer programmed controls are printed on an

exception reports

and are followed up by an assistant to the CFO. Manual follow-up

procedures to

exceptions appear to be effective based on a system walk through.

Required: Assume that you have decided to set AUDIT RISK atvery lowfor both existence and

allocation of receivables.

Develop a preliminary audit strategy for the following two audit objectives, and answer the following

questions.

(1) Existence of accounts receivable

(2) Allocation of allowance of doubtful accounts.

Account: A/R Assertion: Existence

How would you assess INHERENT RISK for Mt. Hood Furniture?

High Moderate Low

Explain at least two reasons for your assessment:

Account: A/R Assertion: Existence

How would you assess CONTROL RISK for Mt. Hood Furniture?

High Moderate Low

Name one control that management could implement that would improve the process providing evidence about this assertion?

How would you recommend testing that control?

Account: A/R Assertion: Existence

How would you assess DETECTION RISK for Mt. Hood Furniture?

High Moderate Low

Name one substantive analytical procedure you could perform on the balance specifically providing evidence of this assertion?

Name one substantive test of detail you could perform on the balance specifically providing evidence of this assertion?

Account: A/R Assertion: Allocation (aka Net Valuation)

How would you assess INHERENT RISK for Mt. Hood Furniture?

High Moderate Low

Explain at least two reasons for your assessment:

Account: A/R Assertion: Allocation (aka Net Valuation)

How would you assess CONTROL RISK for Mt. Hood Furniture?

High Moderate Low

Name one control that management could implement that would improve the process providing evidence about this assertion?

How would you recommend testing that control?

Account: A/R Assertion: Allocation (aka Net Valuation)

How would you assess DETECTION RISK for Mt. Hood Furniture?

High Moderate Low

Name one substantive analytical procedure you could perform on the balance specifically providing evidence of this assertion?

Name one substantive test of detail you could perform on the balance specifically providing evidence of this assertion?