You are auditing the financial statements of the Reis Company, a small manufacturing firm that has been your client for several years. Because you were busy working on another engagement, you sent a staff accountant to begin the audit, with the suggestion that she start with accounts receivable.
Using the prior year's 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 she considered necessary to obtain evidence about the validity and collectibility of the receivables. At the conclusion of her work, you reviewed the working papers she prepared and found she had carefully followed the prior year's working papers.
Reis 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 smaller 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
a. What auditing standards have been violated by the personnel in this case? Explain why you feel the standards have been violated.
b. How do the acquisition and the change in the nature of sales and accounts receivable affect control risk and inherent risk of accounts receivable?
c. Describe how you would adjust your audit strategy for the change in sales and accounts receivable. Explain what additional audit procedures would be necessary (be sure to include discussion of the purpose of the procedure).