You are currently part of the audit team that is conducting the audit of
WaterWorld Enterprises Ltd (WWE) for the year ended 30 June 2019. WWE is
the owner and operator of highly popular theme parks. Your audit manager has
asked you to oversee the audit of its sales and collection system, which is highly
material. You have already completed the tests of controls and substantive tests of
transactions, and are now planning your year-end substantive testing of the
accounts receivable balance.
WWE has a website that allows customers to make bookings online. The
customers include the general public and local and international travel agents.
Travel agents that wish to be able to make bookings on credit must complete an
account application form with at least three references. Your testing has provided
sufficient appropriate audit evidence that credit is granted only after rigorous
credit checks. However, large travel agents often settle their accounts between 60
days and 90 days (not the required 30 days). Given the amount of business
generated from these travel agents, WWE allows this practice to continue. The
business has 450 travel agents as customers. Sixty agents represent 75% of trade
debtors.
Required:
(a) Identify the two key assertions at inherent risk of misstatement for WWE's
accounts receivable, and explain the reasons why (4 marks)
(b) Outline the audit program to be conducted for the substantive testing of the
details of the accounts receivable balance for WWE. Provide a brief reason for
each audit procedure given. (14 marks)
a. existence/occurrence; valuation and allocation, because generally the assets
and revenues are tended to be overstated by companies. Based on the WWE
case, the existence assertion is at risk because it’s likely that travel agents make
bookings on credit without credible and qualified account application forms with
at least three references, especially large of their accountant receivable mount are
from those travel agents. also, as large travel agents often settle their accounts
without the required time may indicate a major collection problem, and would
result in an understatement of an allowance for doubtful debts. So it may overstate
the Account receivable account, posing a high risk on the valuation and allocation
of the account receivable account.
b.
client: WWE
Audit program: Accounts receivable
for the year ended 30 June 2019
1. Initial procedures
a. Trace opening balances for closing balances in the last year’s
working papers (Accuracy)
b. Review the activity in the ledger account over the period (could affect
multiple assertions—existence, completeness...)
c. Reconcile from the debtors’ subsidiary ledger to the control account
in the general ledger (Accuracy)
2. Analytical Procedures (to identify risk of misstatement and plan further
tests)

Determine expectations

Compare current and previous year balances

Calculate significant ratios such as
-
Accounts receivable turnover
-
Gross profit margin

Obtain expectations for unexpected changes

Corroborate explanations
3. Substantive Tests of Transactions

Trace a sample of transactions (sales, cash receipts, sales
adjustments) from the source documents to the ledgers
(Completeness)

Vouch a sample of transactions from the ledgers back to the
supporting documents (Occurrence)

Perform Cut-Off tests for transactions at year-end
4. Substantive Test of Balances

Select a sample of debtors for confirmations (Existence, valuation,
rights)
-
Stratification of sample by meaningful criteria:
o By value ( \six agents represent 75% of trade debts)
o By location (location vs international travel agents0
o By age (the longer outstanding, the more likely debt is
to go bad: those large agents who settle their accounts
without time limit)

Alternative follow-up procedures for non-responses
Evaluate the adequacy of the provision for doubtful debts (MOST
EMPHASIS HERE)
-
Verify Accuracy of items in aged trail balance
-
How has WWE management come up with the amount?
-
For past-due accounts, examine evidence of collectability,
discuss with WWE management, considering and inquiring if
their credit manager is lack of experience or not)
-
Has sufficient allowance been made? General and specific
provisions? Relative to last year account, provision should be
increase or decrease, given the travelling industry condition in
2019?
5. Presentation & Disclosure

Compliance with standards? Any credit balances? Any related
parties? Any factors or assigned debtors?