Introduction to Auditing - Case question

You are the audit senior for the 2017 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, 2017.

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. Most customers do not keep track of their accounts payable.

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 2017, 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.

Aging of Accounts Receivable

Year 2017

Current

$ 7,714,000

Aged between 60 -120 days

88,000

Aged greater than 120 days

66,000

Total Receivables

$7,868,000

Allowance for Doubtful Accounts

135,000

Net Receivables

7,733,000

Year 2016

Current

$ 6,695,000

Aged between 60 -120 days

nil

Aged greater than 120 days

nil

Total Receivables

6,695,000

Allowance for Doubtful Accounts

nil

Net Receivables

6,695,000

Required

a) Can you please explain the impact of the IML program on your risk assessment and audit procedures relatingto the AFDA?

b)Do you agree with the auditors' decision to not send out accounts receivable confirmations? Why or why not?

c) If the auditors planned to send out accounts receivable confirmations, what type of confirmations would you recommend? Can you please provide brief explanation?