Auditing

Basic Information

You are a partner in the firm of Dunning, Ko & Co. and you are responsible for conducting the final independent review of audits completed by the firm. Dunning, Ko & Co. is a full-service medium-sized public accounting firm that specializes in the audits of moderate-sized high-technology companies.

You are currently reviewing the audit working papers and a draft of the audited financial statements of Simply Electric Inc. (Simply Electric) for the year ended December 31, 2019, as well as the draft audit report (an unqualified opinion dated February 19, 2020) that was prepared by the engagement partner.

Dunning, Ko & Co. have been auditors since the companys inception. The 2019 audit fieldwork was performed by a senior auditor (who had not previously worked on the audit of this particular client) and two junior auditors, and the working papers were reviewed by a manager and the engagement partner.

Based on your review of the working papers, the draft financial statements, and the audit report, you have noted the following:

REAL INFORMATION

Balances for confirmation of accounts receivable were selected using systematic sampling and the dollar unit sampling methodology. A total of 40 confirmations were prepared and mailed out by the controller of Simply Electric to those accounts selected by the auditors. Of these, 36 were eventually returned directly to the auditors with no differences. The remaining four accounts were verified by vouching the balances reported as due to the sales invoices issued during 2019. No exceptions were found.

The junior auditor responsible for auditing the accounts receivable balances then discussed the provision for doubtful accounts with the controller and concluded that it was adequate, and included a note in the working papers of their discussion. No additional work was performed on accounts receivable or the allowance for doubtful accounts.

The senior auditor recalculated the returns and allowance using the historical rate of returns which was noted in the previous years audit file. She calculated an appropriate year-end provision for returns and allowances to be in the range of $300,000 to $400,000. The client had booked a returns provision in the amount of $350,000 therefore she determined that no error was required to carry forward to the unadjusted error summary.

QUESTION

List two (2) major deficiencies in the work performed in the accounts receivable testing and explain the nature of the deficiencies. Provide recommendations regarding further actions and/or audit procedures.