A staff member on your audit team has performed a portion of the audit plan for the audit of Keystone Computers & Networks Inc., a nonissuer. The procedures involved selecting a random sample of sales invoices from throughout the year and comparing them to the authorized customer list and to appropriate support related to the sale. Required: Your job as senior on the engagement is to review the various points made by the assistant, including consideration of the exhibits. For each of the sentences called out in the points on the document, determine if the current language is appropriate as is, should be removed altogether, or replaced with any of the provided alternatives. Links to each of the exhibits are provided in the document, but are available in the list below for convenience. Exhibit 1- Sales Invoice Sample Exhibit 2 - Sample Inputs and Results Exhibit 3 - Conversation with Controller Memo Exhibit 4 - Conversation with Billing Clerk Memo Document (For each Document Callout, choose the correct Determination from the table below.) Exhibit 1 Authorized Sales Joumal Delivery Sales Invoice Sample Customer List Shipping Document Advice Recorded Invoice Details of documents in Sales Jounal Authorized Date sent to Invoice No. Purchaser Date Amount Customer Date Shipped Terms Delivered customer agree 10239 Marvella Menefee 1/04/year 5 4,557.60 Y 1/04/year 5 1/04/year 5 FOB Shipping 1/06/year 5 Y Y 10379 Wingo Corp. 1/19/year 5 13,539.94 Y 1/19/year 5 1/19/year 5 FOB Shlpping 1/20/year 5 Y Y 10403 Lola Incorp. 1/19/year 5 854.51 1/19/year 5 FOB Shipping 1/21/year 5 N. 1/19/year 5 Y Y 10410 1,151.59 1/22/year 5 1/22/year 5 FOB Shipping 1/27/year 5 Charolette Granderson 1/22/year 5 Y Y Y 10478 Rufus Leeks 2/09/year 5 13,144.44 Y 2/09/year 5 2/09/year 5 FOB Shipping 2/11/year 5 Y Y 10495 Helena Mcguigan 2/10/year 5 10,846.72 Y 2/10/year 5 2/10/year 5 FOB Dest 2/15/year 5 Y Y 10526 Ling Incorp. 2/18/year 5 2,558.47 Y 2/18/year 5 2/18/year 5 FOB Shipping 2/20/year 5 Y Y 10565 Isidro Durrance 2/18/year 5 7,679.81 Y 2/18/year 5 2/18/year 5 FOB Shipping 2/21/year 5 Y Y 10620 Willams Plant Spec. 2/18/year 5 5,782.62 Y 2/18/year 5 2/18/year 5 FOB Shipping 2/20/year 5 Y 2/23/year 5 FOB Shipping 2/24/year 5 10735 Chae Nicolosi 594.77 Y 2/23/year 5 2/23/year 5 Y Y 10737 Helena Mcguigan 2/23/year 5 2,748.76 Y. 2/23/year 5 2/23/year 5 FOB Shipping 2/26/year 5 Y 10768 Ernesto Emigh 3/03/year 5 12,371.50 Y. 3/05/year 5 3/03/year 5 FOB Shipping 3/07/year 5 Y Y 10822 Jennifer Jones Jeans 3/17/year 5 8,289.44 Y 3/17/year 5 3/17/year 5 FOB Shipping 3/19/year 5 Y Y 10869 Jone Board 3/29/year 5 7,672.66 Y 3/29/year 5 3/29/year 5 FOB Shipping 4/03/year 5 Y Y 10877 Terrell Rufener 4/07/year 5 300.33 Y 4/07/year 5 4/07/year 5 FOB Shipping 4/12/year 5 Y. Y 10919 Hectors Hinklo corp. 4/25/year 5 12,509.57 Y 4/25/year 5 4/25/year 5 FOB Shipping 4/28/year 5 Y Y Mary Hagwood 5/31/year 5 FOB Shipping 6/02/year 5 10940 9,755.97 Y. 5/31/year 5 5/31/year 5 Y Y 10961 Shar Oil 6/03/year 5 12,875.53 N. 6/03/year 5 6/03/year 5 FOB Shipping 6/08/year 5 Y Y 11006 Sherryl Elsberry 6/04/year 5 12,884.30 Y 6/06/year 5 6/04/year 5 FOB Dest 6/17/year 5 Y Y 11061 Alysa Mgf. 6/14/year 5 250.23 N 6/14/year 5 6/14/year 5 FOB Dest 6/19/year 5 Y Y 11120 Monet Eady 6/19/year 5 4,748.74 Y 6/19/year 5 6/19/year 5 FOB Dest 6/20/year 5 Y Y. 11184 Adams Mart 6/22/year 5 3,298.92 Y. 6/22/year 5 6/22/year 5 FOB Shipping 6/24/year 5 Y Y 11224 Tory Vargas 7/18/year 5 14,821.84 Y. 7/18/year 5 7/18/year 5 FOB Shipping 7/23/year 5 Y Y 11227 7/28/year 5 7/28/year 5 7/28/year 5 FOB Shipping 8/12/year 5 Keira Dion 3,816.34 Y. Y Y. 8/10/year 5 8/09/year 5 FOB Shipping 11250 Smith Inc. 8/09/year 5 14,770.15 Y 8/13/year 5 Y Y 11297 Laraine Peralta 8/11/year 5 4,831.41 Y. 8/11/year 5 8/11/year 5 FOB Shipping 8/15/year 5 Y 11309 Charles' Inco. 9/10/year 5 936.97 FOB Shipping 9/14/year 5 Y 9/10/year 5 9/10/year 5 Y Y 11324 Joycelyn Huber 10/05/year 5 8,024.79 Y. 10/05/year 5 10/05/year 5 FOB Shipping 10/08/year 5 Y Y 11369 Lesli Matamoros 10/17/year 5 13,268.00 Y 10/17/year 5 10/17/year 5 FOB Shipping 10/21/year 5 Y Y 11485 Blanchard Co. 10/21/year 5 3,676.32 Y 10/21/year 5 10/21/year 5 FOB Shipping 10/24/year 5 Y Y 11486 Wingdoll, Corporation 10/27/year 5 3,744.02 Y 10/27/year 5 10/27/year 5 FOB Dest 10/31/year 5 Y Y 11499 Genesis Bellefs 11/04/year 5 11,364.69 Y. 11/04/year 5 11/04/year 5 FOB Dest 11/08/year 5 Y Y. 11526 Charolette Granderson 11/05year 5 2,074.39 Y. 11/05/year 5 11/05/year 5 FOB Dest 11/08/year 5 Y. Y 11/07/year 5 11/07/year 5 11/13/year 5 11602 Thomas Mo. 2,681.88 Y. 11/07/year 5 FOB Dest 11/12/year 5 Y 11696 11/13/year 5 FOB Shipping 11/18/year 5 Anastacia Italiano 2.120.18 Y 11/13/year 5 Y Y 11775 Lloyd Sumrell 12/18/year 5 1,330.95 Y 12/18/year 5 12/18/year 5 FOB Shipping 12/22/year 5 Y Y 11779 Wiliams Co. 12/22/year 5 8,760.84 Y. 12/22/year 5 12/22/year 5 FOB Shipping 12/24/year 5 Y Y 11925 12/25/year 5 12,747.04 12/25/year 5 FOB Shipping 1/02/year 6 Cristobal Posada Y 12/25/year 5 Y. 11961 Junie Denison 12/28/year 5 1,536.08 Y 12/28/year 5 12/28/year 5 FOB Shipping 12/31/year 5 Y Y 11982 Wellington Assoc. 12/29/year 5 11,412.25 Y 12/29/year 5 12/29/year 5 FOB Shipping 1/03/year 6 Y Y. As per auclit plan, details of sales journal, sales invoice, shipping document, and invoice agree. Exhibit 2 Sample Inputs and Results Attribute Sales to Unauthorized Customers Risk of Assessing Control Risk Too Low 5% Expected Deviation Rate 5% Tolerable Deviation Rate 15% Sample Size 40 Results Deviations Sample Deviation Rate 7.5% Achieved Upper Deviation Rate 18.3% Decision Reject Exhibit 3 Conversation with Controller Memo I spoke with the controller on this issue of FOB Shipping Point versus FOB Destination freight. She informed me that a decision is made based on the likelihood of losing the client if the client is expected to pay the freight. Thus, if customer X isn't all that steady of a customer, particularly a customer who uses other sup- pliers, the company then offers the term FOB Destination and does not charge the customer for the freight. She also pointed out that the policy is beginning to cause a few problems as several customers have brought up the topic that they "heard" that not everyone had to pay the freight. She indi- cated that she told those customers that such shipping only occurred in rare and unexpected circumstances. Although her reply seems to understate the FOB Destination issue, I pass further review of it. Audit Assistant Exhibit 4 Conversation with Billing Clerk Memo I spoke with the Billing Clerk, who helped me organize my thoughts about Keystone's billing sys- tem. The company always bills the day that it ships items to customers. Generally, the customer pays for the shipping, although this is not always the case. When I asked him if there have been any "difficulties" during the year, he mentioned that in a few situations, goods had been shipped and no invoice had been prepared for the shipment, and accordingly, no sales journal entry had been prepared until the company discovered the prob- lem, once when a customer returned the goods and several times when customers asked about billing. He assured me that the problem had been rectified and that he believed there were no more such transactions. (A new employee had been involved who didn't completely understand the electronic process.) Audit Assistant Memo re Keystone Sales Invoice Procedures/Results 1/22/year 6 A number of the credit sales in our sample were to customers not on the authorized customers list (Exhibit 1, fifth column). Selling to unauthorized customers may increase the risk that receivables will not be collectible. Accordingly, to address this issue, I suggest that we test for year-end receivables to unauthorized customers that remain uncollected as of the end of January. For those not collected, we should corroborate that the client has taken its normal 2 percent estimate for credit losses. (Callout # 1) Keystone in some circumstances ships sales FOB destination and pays the freight (see Exhibit 3). Because title ordinarily passes on such goods when they are delivered, there is a possibility that some sales have been recorded prior to the passage of title. Accordingly, we should increase the scope of our audit plan by selecting a sample of sales shipped FOB Shipping Point shortly after year-end to determine that the sale is recorded in the period goods were received by the customer. (Callout #2) Our sample results (Exhibit 1) reveal two sales recorded in year 5 that should have been recorded in year 6. (Callout #3) A billing clerk (Exhibit 4) informed us that in several cases, sales were not recorded (completeness). Based on the discussion, an effective audit procedure to address this would be to select a sample of invoices sent to customers and agree their details to the underlying customer purchase order and shipping document. (Callout # 4) As a part of the audit of sales to unauthorized customers (above, top paragraph), we selected a sample of 40 sales invoices and found that three in our sample were to unauthorized customers. As indicated above, Exhibit 1 details our sample; Exhibit 2 presents results relating to the sample. The most likely deviation rate in the population is 5 percent (Callout #5). The sample results in "rejection" because the achieved upper deviation rate exceeds the sample deviation rate (Callout #6). Because we do not intend to expand our sample, the most likely effect on our audit will be a decrease in the assessed level of control risk (Callout #7) for the related assertion(s). Callouts Determination 1. "For those not collected, we should corroborate that the client has taken its normal 2 percent estimate for credit losses." 2. "Shipping Point shortly after year-end to determine that the sale is recorded in the period goods were received by the customer." 3. "two sales recorded in year 5 that should have been recorded in year 6." 4. "invoices sent to customers and agree their details to the underlying customer purchase order and shipping document." 5. "5 percent" 6. "sample deviation rate." 7. "assessed level of control risk" Callouts Dtermination or those not collected, we should corroborate that lient has taken its normal 2 percent estimate for t losses." hipping Point shortly after year-end to determine that ale is recorded in the period goods were received by ustomer." Retain the original text. vo sales recorded in year 5 that should have been rded in year 6." Delete the text. Replace with "For those collected, we should corroborate that the client decreases the allowance for doubtful accounts." voices sent to customers and agree their details to inderlying customer purchase order and shipping ment." Replace with "We should age all uncollected accounts as of year- percent" imate for determine that re received by Replace with "For those collected, we should corroborate that the client decreases the allowance for doubtful accounts." have been Replace with "We should age all uncollected accounts as of year- end, paying particular attention to those to unauthorized customers to estimate likely doubtful accounts." eir details to Replace with "It seems appropriate to double the client's normal 2 percent estimate for credit losses for sales to the unauthorized d shipping nat end, paying particular attention to those to unauthorizea customers to estimate likely doubtful accounts." by Replace with "It seems appropriate to double the client's normal 2 percent estimate for credit losses for sales to the unauthorized customers." Replace with "As a conservative approach, we should propose journal entries writing off all uncollected accounts from unauthorized customers."