Auditing Case Study

Horizon Cycle Factory (HCF) is a large manufacturer and distributer of racing bikes. They have been in business since 1937. Their annual revenues exceed $17,000,000 and profit exceed $2,500,000 annually. Their operations are in 29 different countries in Asia, Europe, and the Americas. They have 1,700 customers around the globe. Recently they had an issue with their existing Auditing Firm and have decided to start using your Audit firm for their 2013 financial statements. Your team has been assigned to audit the revenue cycle of HCF. During your initial inquiry you uncovered the following facts:

1. HCF has three different departments to handle the activities in the revenue cycle; the order and shipping department, the billing department, and the accounts receivable department. 

2. HCF has a process of approving their customer credit. Once a customer is approved for credit, it is valid until the customer continues doing business with HCF. 

3. The credit approval requires the customer to fill out a standard application. After the application is reviewed by the credit manager, it is sent to the controller for the final approval. 

4. HCF uses an outside shipping company for shipping their goods to their customers. 

5. The orders of the customers are usually taken via phone or over the internet. There are a few customers who send their orders hard copy but the number of those customers are reducing rapidly. 

6. The breakdown of the accounts receivable account is as follows: 


Number of Customers	Balance of A/R for each Customer	Total Accounts Receivable
17	Greater than $18,000	$650,000
345	Greater than $2,500	$1,250,000
1200	Less than $2,500	$2,250,000

7. The CEO and the CFO of the company were hired together in December of 2012 and they both used to work at HCF biggest competitor Fast and Furious Cycles.

Required:

1. Identify and describe the issues that have the potential to increase the inherent risk. 


1. Identify any internal control weakness that might exist based on the information you discovered. 

2. What type of audit sampling technique would you use to test the process of customer credit approval? Why? Describe the steps you would implement practically to follow prescribed method of the selected sampling technique. 

3. What type of audit sampling technique would you use to test the reasonableness of the accounts receivable account? Why? Describe the steps you would implement practically to follow prescribed method of the selected sampling technique.