Hi,

I need help in assignment in Audit. It' due to tomorrow 2pm.

Question 4 ( 13 marks) You are the audit senior for the 2015 year-end audit of Clearly Contacts (CC), a publicly traded Canadian company, that is one of the largest and fastest on-line vision care providers in the world. Because of the efficiencies of the Internet to bypass middlemen, CC has a significant competitive advantage in its market. You are responsible for auditing the revenue cycle. Performance materiality for the CC audit is $100,000. CC's year-end is October 31, 2015. Below is a summary of key information regarding the revenue cycle: Revenue Recognition Policy - Revenue from product sales is recognized when the product has been shipped to the customer. At that point, the amount of sales revenue is determinable, no significant vendor obligations remain and the collection of the revenue is reasonably assured. A provision is made for product returns. Revenue collected in advance of the product being shipped is deferred. Audit Strategy for Revenue - The audit strategy relies upon tests of controls, (including substantive tests of transactions), and substantive analytical procedures. There are no accounts receivable confirmations sent out. Your audit team has tested controls related to revenue transactions and concluded that controls are effective and support the control risk assessment of low for the revenue transaction-related assertions. Change in Credit Policy - When reviewing the accounts, you noted that a new account, allowance for doubtful accounts, has been set up. Upon investigation, you find that in February 2015, CC implemented a program where the majority of customers were granted credit. CC developed this program to attract new customers who might be wary of ordering contact lenses from an on-line retailer and having to pay for them prior to receiving them. The company's program, named \"Invoice Me Later, or IML, allows customers to order from CC and pay after receiving the product. Management estimates payment should be generally received in less than 15 days. Estimate for Allowance for Doubtful Accounts - The majority of the balances outstanding are less than $150 and there are a large number of records. Management estimates an allowance based upon the aging of the receivable portfolio. Below is a summary of the aging and management's estimate for the allowance for doubtful accounts. 1 Aging of Accounts Receivable Current Aged between 60 -120 days Aged greater than 120 days Total Receivables Allowance for Doubtful Accounts Net Receivables 2015 $ 7,714,000 88,000 66,000 $7,868,000 135,000 7,733,000 2014 $ 6,695,000 nil nil 6,695,000 nil 6,695,000 Required a) Explain the impact of the IML program on your audit strategy for the revenue cycle of CC. (Use the audit risk model and assertions to support your analysis). (5 marks) b) Do you agree with the auditors' decision to not send out accounts receivable confirmations? Why or why not? (4 marks) c) If the auditors planned to send out accounts receivable confirmations, what type of confirmations would you recommend? Explain why. (4 marks) Question 3 (15 marks) You are the in charge auditor for Johnny Gold Jewellers (JGJ) which has seven stores in the Toronto area. The fiscal year end of the company is December 31. The company deals in precious and semi-precious stones and high quality costume jewellery. Diamond engagement rings make up over 50% of sales and 10, 14, and 18 carat gold chains make up another 20%. During peak demand periods, for example just before Christmas and Valentines Day, Mr. Gold acquires on consignment jewellery from another manufacturer. The president, Johnny Gold, is an accredited geologist. Mr. Gold attends auctions in New York and London several times a year. The rough cut gems are ground and polished in JGJ's lab in the flagship store and distributed among the seven stores. Mr. Gold needs to anticipate well in advance what he believes the latest trends in costume jewellery will be. Mr. Gold's track record is excellent but occasionally he misses the mark and has to sell some of the jewellery at a substantial discount. The company plans to do its inventory count on December 31, 2015. Perpetual inventory records are kept in each store, which should balance to a control account kept in the main branch. Documentation for all purchases is kept in the main branch. Mark-ups average 150% on cost. 2 All inventories are insured with a 50% co-insurance clause, and employees are bonded. All employees receive a bonus based on sales for the last 2 weeks in December. The bonus is based on the numbers of years working at JGJ as well as a percentage of sales. It is now December 10, 2015 and you are preparing for the physical inventory count on December 31, 2015. Required Explain briefly five specific risk factors related to the counting and valuation of JGJ's inventory at December 31, 2015. For each risk identify the management assertion and one audit procedure to address the assertion (15 marks). Arrange your answer using the table on the following page. Explanation of Risk (1 mark) Audit procedure to address management assertion ( 1 mark) and note the assertion (1 mark) 3 4