You are auditing the financial statements of the ATLAS Company, a small manufacturing firm that has been your client for many years. Because you were busy working on another engagement, you sent a second-year accountant to begin the audit, with the suggestion that he start with accounts receivable.

Using the prior years working papers as a guide, the auditor prepared a trial balance of the accounts, aged them, prepared and mailed positive confirmation requests, examined underlying support for charges and credits, and performed other work he considered necessary to obtain evidence about the validity and collectability of the receivables. At the conclusion of his work, you reviewed the working papers he prepared and found he had carefully followed the prior years working papers.

ATLAS Company acquired the assets of another corporation during the year, so the nature and quality of its accounts receivable have changed. It has many more small accounts, as well as three larger international clients involving foreign exchange sales transactions. Sales have gone up substantially, and the accounts receivable balance has doubled. Two of the international accounts are over six months old and involve complex hedging transactions.

Required

What auditing standards have been violated in this case? Explain why (6marks)

How does the acquisition and the change in the nature of sales and accounts receivable affect control risk and inherent risk of accounts receivable? (6marks)

Describe how you would adjust your audit strategy for the change in sales and accounts receivable. Explain what additional audit procedures would be necessary (include discussion of the purpose of the procedure).