Margaritaville, CPA has been engaged to audit Underwood Companys financial statements. Underwood Company is a privately owned company and the auditors will use the auditing standards of the ASB, Committee of the AICPA. Senior Auditor, Adele, has been assigned to the audit of accounts receivable. Senior Auditor Adele selected a random sample of 40 accounts to be confirmed. She prepares 30 positive confirmations and 10 negative confirmations. Confirmations are sent confirming the October 31^st balance, even though Underwood has a year-end of December 31. Adele states in her memo that confirming as of October 31 and the use of negative confirmations is supported because control risk has been assessed at a high level and the auditor has set the inherent risk at a high level. After careful selection and preparation procedures, she gave the confirmations to the Presidents secretary to mail. The President removed one positive confirmation from the sample due to issues with that customer. Adele was fine with the removal of this one item.

Five confirmations stating that the (customer) did not agree with the balance stated on the confirmation were returned. Adele assumed that the differences were errors and concluded that A/R could be overstated/understated by 12.5%.

Adele did not receive a response from ten of the confirmations. Therefore, she decided to do the best alternative auditing procedure, which was to look at invoices sent from the client to their customer. Adeles final conclusion included the following: I am 95% confident that Accounts Receivable is fairly stated as the expected misstatement was less than the projected misstatement.

Required: After reading the above memo, review relevant audit standards at https://www.aicpa.org/research/standards/auditattest.html. Note that the AICPA has recently codified the SASs into AU-C sections. You will find AU-C sect. 330 and AU-C sec. 505 to be relevant to your situation. Complete the table by listing any incorrect assumption or statement used by Adele in the audit of Accounts Receivable. In the next column explain why it is incorrect and what would have been the best course of action per the auditing standards. Please list your points in table format with each point in its own row. A new row is created by hitting the tab key.

Incorrect Assumption

Why it was incorrect? What would have been the best course of action?