Question
You are the engagement manager for the annual audit of Image Computer, Inc. (Image), a large, publicly owned retailer of computer hardware in the United
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You are the engagement manager for the annual audit of Image Computer, Inc. (Image), a large, publicly owned retailer of computer hardware in the United States. You are responsible to review the section of sales revenue and accounts receivable. The Image engagement team has confirmed accounts receivable as of December 31, 2020, the end of fiscal year of 2020. While reviewing the section of receivables, you noticed the following situations:
1) Company A sent back the original confirmation, on which it stated that the balance had been paid in full on 12/24/2020. Per discussion with clients controller, the engagement team found out that the customers payment was received on 12/30/2020, and was recorded on 1/1/2021. The engagement team accepted this explanation and did not propose an adjustment.
2) Company B sent back the original confirmation, on which it stated that part of the products had been returned to Image on 12/28/2020 and the records of Company B showed a smaller balance with Image. The engagement team discussed with the client about the discrepancy. The controller explained that the returned items were received on Jan 2, 2021 due to the delay of holidays. He mentioned that the typical sales terms do not allow product return, and Company B had returned a large number of first quality items. The engagement team accepted this explanation, and verified the subsequent receipt of returned items, based on which they proposed adjustments to write off part of the sale and receivable by the amount of returned products.
3) Company C did not reply the confirmation. The staff auditors discussed with the controller. He answered that Company C is one of their resellers, and they entered into a large-amount sale on 12/28/2020. All products for the sale have been shipped on 12/31/2020, FOB shipping point, therefore Image recorded the sale on that date. The working paper stated that the staff auditors had reviewed the sales invoice, shipping document and the draft sales contract, and concluded that the sale was properly recognized. The draft sales contract was attached to the working paper. While reviewing the contract, you noticed that the payment was contingent on the success of Company C reselling the products to a third party.
Required:
Considering the procedures performed and the evidence collected, please
a) discuss whether the confirmation and follow-up procedures represent sufficient evidence. If
not,
b) what additional audit procedures, should be performed? Please explain briefly.
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