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Case Study question in Auditing You are the audit supervisor of Hasel Co, which is a manufacturing company. You are currently planning the audit of

Case Study question in Auditing

You are the audit supervisor of Hasel Co, which is a manufacturing company. You are currently planning the audit of trade receivables for the year ended 31 December 20x8. At 31 December, Hasels trade receivables balance was $6.500.000. Hasel Co has more than 600 customers, including nine customers owing more than $250.000 each. Tests of control revealed weaknesses in Hasels internal control over sales and trade receivables. In prior year audits, confirmations revealed misstatements in several customers account balances.

  1. Tests of control revealed that there is often a delay between Hasel Cos delivery of goods to customers and the subsequent raising of sales invoice. Complete the sentence below to describe a test to establish the extend of any understatement of receivables at the year end.

The auditor should compare sales order/ goods despatch notes/ sales invoices/ the sales ledger shortly before/ after the year end with sales order/ goods despatch notes/ sales invoices/ the sales ledger

2. Select the type of confirmation request that should be sent to Hasel Cos customers with a valid reason for that type of confirmation.

The confirmation request should be negative/ positive because Hasel Cos customers are expected to ignore the confirmation request/ misstatements were revealed in the prior year/ the risk of material misstatement is high/ there is large number of small balance account

3. After sending confirmations to Hasel Cos customers, you received a reply from a customer which shows that the outstanding balance is not agreed. Which of the following would be the most appropriate audit procedure to perform following this response?

  1. Agree payments included in the customers statement to cash received by Hasel Co before the year end
  2. Check whether invoices not included in the customers statement agree to despatch notes raised before the year end
  3. Send a second confirmation request asking the customer to recheck their records
  4. Require Hasel Co to adjust the customers receivable balance to the amount owed according to the customer

4. One of Hasel Cos customers responds that it cannot confirm the amount owed due to the form in which it keeps its accounting records. Which TWO of the following audit procedured are appropriate to follow up on this response?

  1. Confirm cash receipts received from the customer shortly before the year end
  2. Send a second confirmation request asking the customer to have their auditor check their records
  3. Examine cash receipts received from the customer after the year end
  4. Inspect supporting documentation such as the invoice and dispatch note

5. The managing director of Hasel Co has refused permission to send a direct confirmation request to a major customer selected for that procedure, on the grounds that the customer is a close friend who may take offence at such a request. What is your next course of action?

  1. To substitute the balance selected with another customers having similar characteristics to preserve the integrity of the sample
  2. To advise that his refusal constitutes a restriction to scope which lead to a qualification of the audit opinion
  3. To carry out the confirmation procedures as planned since the auditors responsibility is to the shareholders and not the directors
  4. To carry out the confirmation procedures on the other balances selected and apply alternative procedures to confirm the balance of this major customer

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