The Audit Risk Model - Existence of AR isume that you are auditing sales and accounts receivable in the 3rd year of your audit of Mt. Hood Furniture, a privately held company, ou know the following from your risk assesament procedures. - Management has been very conscious about reporting accurate earnings. - The company now has stable management and the company has retained competent accounting personnel. - The CFO implemented a new computerized accounting system last year. - Tests of controls in the prior year show that programmed controls were effectively designed and that they operated offoctively. - ML. Hood has kept an emphasis on growing sales and the company has approved soles to customers with higher credit risks. This was done with the knowledgo of the board of directors. - Increasing competition from new entrants into the retail otfice furniture business has been negatively impacting the financial position of Mt. Hood's customers. - Management continues to receive significant bonuses based on sale volume. - The CFO reviews the allowance for doubtful accounts and other estimates quarterly. - Sales returns have been immaterial. - The Company has strong controls over cash receipts. - The Company has placed in operation the following programmed control activities: - The amount of the purchase plus the customer's acoounts receivable balances is compared with the customer's credt limit bolore a sales order is approved. - All goods pulled from inventory are matched with approved sales order information. - Quantities on every sales invoice are checked against shipping information and prices are checked againgt the mastar price file - Exceptions are printed on an exception report and the transactions are held in a suspense file for follow-up. Manual follow-up procedures appear to be effective based on a system walk through. - The computer compares the date on the sale invoice with the date on shipping records. - The computer matches every sales invoice with an underlying bill of lading, and then it cancols the bill of lading so that it cannot be matched with another sales invoice. - The computer chocks run-to-run totals of beginning AR balances, plus sales; minus cash receipts with ending AR balanons - The company generates an aging of accounts receivable monthly. - Any exceptions to tho computer programmed conirols are printed on an exception reports and are followed up by an assistant to the CFO. Manual follow-up procedures to exceptians appear to be effective based on a system walk through. Your teammate Taylor has asserted that IR thould be assessed at HIGH for the existence. of AR. What is one factor that would support Taylor's assessment? (5 pto) Taylor has also said that "it looks like there are some good controls in place to protect the existence of AR: What is one control Taylor might be takking abouk? (5 pts) Describe one specific test of control procedure you would perlorm to test the internal control you mentioned in the tast guestion. (10 pts) Specify one aubstanitive teat of defail that would be appropriate to test the existenoe of AR. (10 pts)