ASSIGNMENT 1
ACCOUNT RECEIVABLE AND CREDIT SALES
APPLE BLOSSOM COLOGNE COMPANY
SUBSTANTIVE AUDIT PROCEDURES: ACCOUNTS RECEIVABLE AND BAD DEBTS
To begin your substantive audit work in the accounts receivable area, you obtain an aged trial balance
from Don McKenna. This schedule is included in the working papers with this assignment section
referenced B-1. Your may assume that you can check the aged trial balance with the accounts receivable
subsidiary ledger and that the subsidiary ledger supports the aged trial balance as to both amounts due
and age of accounts.
On Monday, January 3, with the client’s assistance, you prepared and mailed both positive and negative
accounts receivable confirmations. Positive confirmations were sent to five customers, as follows: (1)
Frankie’s Floral Fragrances, (2) Tears and Doefall Company, (3) Anne Charlotte Cosmetics, (4) Young and
Beautiful, and (5) Darings. Negative confirmations were mailed to all other customers with an accounts
receivable balance. The confirmation from Capitol Odors was returned by the post office because of
inability to deliver. You have received replies on all of the positive confirmations and no replies to the
negative negative confirmations. The positive confirmations are referenced B-2 through B-4. Upon
checking with John Roberts, you learn that a $1.450 credit should have been issued to Anne Charlotte
Cosmetics but the credit was never posted.
You have also discussed the delinquent accounts with John Roberts, and he had the following comments
about those customers and their paying habits:
Alpha Aroma
Good account
Anne Charlotte Cosmetics
Credit of $1.450 should be allowed
Bobell Beauty Supply
Never been delinquent before
Body Bar
Slow paying, good account
Capitol Odors
Probably will collect nothing
Cut-Rate Discount Stores
Slow paying, but has always paid
Darings
Established company, good pay
Inceses, Inc
Never been delinquent before
Janis Dept. Store
Slow paying, good account
Rausch’s Department Store
Good account
John Robert indicated that he had spoken with both Parker Shelton, controller, and Ellen Jacobs, sales
manager, about the delinquent Capitol Odors account. They were in agreement that it should be written
off. Account amounting to $11,700 had been written of during the year, you noted that all write-offs
were approved by Mr. Roberts.
From the cash receipts journal you were able to learn of the following subsequent payments on the
accounts receivable balances as of December 31, 2011
Customer
Anne Charlotte Cosmetics
Body Bar
Capitol Odors
Payment Amount
$30,900
1,850
3,600
Date
January 12
January 09
January 14
Cut-Rate Discount Stores
Darings
Incense, Inc.
Janis Department Store
Lone Star Supply
Rausch’s Department Store
Tears and Doefall Company
Young and Beautiful
1,800
36,000
6,000
5,200
2,400
3,400
70,000
18,000
Apple Blossom Cologne Company
Account Receivable-Aged Trial Balance
31 December 2011
(Prepare By Client)
Cutomer
Current 30-60 days
Alpha Aroma
1,180
900
Anne Charlotte Cosmetics
30,900
1,450
Bobell Beauty Supply
1,460
Body Bar
2,100
800
Capitol Odors
Cut-Rate Discount Stores
2,380
1,720
Darings
36,500
7,600
Franscies Floral Flag
22,300
Incense, Inc.
6,300
600
Janis Department Store
4,600
Lone Star Supply
3,290
Rausch’s Department Store
2,700
1,350
Tears and Doefall Company
77,540
William's Fragrances
1,850
Young and Beautiful
23,000
Various Other Accounts
4,830
Total
214,870
20,480
January 07
January 03
January 07
January 03
Janyary 14
January 07
January 03
January 04
60-90 days
> 90 days
1,050
800
400
1,250
2,700
800
Total
2,080
32,350
1,460
3,950
800
4,500
44,100
22,300
6,900
5,850
3,290
4,050
77,540
1,850
23,000
4,830
238,850
CONFIRMATION REPLIES – CURRENT YEAR (2011)
-----------------------------------------------------------------------------------------------------------------------------------------CONFIRMATION OF ACCOUNTS RECEIVABLE
B-2
Confirmation Request No. 1
Anderson, Odds, and Watershed
Certified Public Accountants
615 Big City Bank Building
Chicago, Illinois
Dear Sir,
The statement of our account showing a balance of $ 22,300 as of 31/12/2011 is correct except as
noted below.
Very truly yours,
Frankie’s Floral Fragrances,
James Whitemore
Chief Accountant
Date: January 17, 2012
Exceptions:
No exceptions
-----------------------------------------------------------------------------------------------------------------------------------------CONFIRMATION OF ACCOUNTS RECEIVABLE
B-3
Confirmation Request No. 2
Anderson, Odds, and Watershed
Certified Public Accountants
615 Big City Bank Building
Chicago, Illinois
Dear Sir,
The statement of our account showing a balance of $ 77,540 as of 31/12/2011 is correct except as
noted below.
Very truly yours,
Tears and Doefall Company
William O’Keefe
Chief Accountant
Date: January 21, 2012
Exceptions:
$70,000 payment made prior to December 31, 2011. Balance as of December 31, 2011 should
be $7,540
-----------------------------------------------------------------------------------------------------------------------------------------CONFIRMATION OF ACCOUNTS RECEIVABLE
B-4
Confirmation Request No. 3
Anderson, Odds, and Watershed
Certified Public Accountants
615 Big City Bank Building
Chicago, Illinois
Dear Sir,
The statement of our account showing a balance of $ 32,350 as of 31/12/2011 is correct except as
noted below.
Very truly yours,
Anne Charlotte Cosmetics
William Brown
Chief Accountant
Date: January 17, 2012
Exceptions:
We returned $1,450 of merchandise in November. We were promised credit but have not yet
received it.
-----------------------------------------------------------------------------------------------------------------------------------------CONFIRMATION OF ACCOUNTS RECEIVABLE
B-5
Confirmation Request No. 4
Anderson, Odds, and Watershed
Certified Public Accountants
615 Big City Bank Building
Chicago, Illinois
Dear Sir,
The statement of our account showing a balance of $ 23,000 as of 31/12/2011 is correct except as
noted below.
Very truly yours,
Young and Beautiful
Roger McAdams
President
Date: January 17, 2012
Exceptions:
We only owe $5,000. Balance above is incorrect
-----------------------------------------------------------------------------------------------------------------------------------------CONFIRMATION OF ACCOUNTS RECEIVABLE
B-6
Confirmation Request No. 5
Anderson, Odds, and Watershed
Certified Public Accountants
615 Big City Bank Building
Chicago, Illinois
Dear Sir,
The statement of our account showing a balance of $ 44,100 as of 31/12/2011 is correct except as
noted below.
Very truly yours,
Dearings
Rosemary William
Chief Accountant
Date: January 14, 2012
Exceptions:
No exception
----------------------------------------------------------------------------------------------------------------------------------------Excerpt of the above confirmation replies:
B-2
Frankie’s Floral Fragrances, balance of $22,300, exceptions: none
B-3
Tears and Doefall Company, balance of $77,540, exceptions: $70,000 payment made prior to
12/31/2011, balance as of 12/31/2011 should be $7,540
B-4
Anne Charlotte Cosmetics, balance of $32,350, exceptions: We returned $1,450 of merchandise
in November 2011. We were promised credit but have not yet received it.
B-5
Young and Beautiful, balance of $23,000, exceptions: We only owe $5,000. Balance above is
incorrect.
B-6
Darings, balance of $44,100, exceptions: no exceptions.
Instructions:
1. Begin with the list of typical Errors or Irregularities below, write your audit program to detect these
potential errors or irregularities.
a. Sales amounts may have been incorrectly recorded
b. Goods may have been shipped but not billed to the customer
c. Sales may have been billed to the customer but not shipped
d. Sales may have been recorded in the wrong accounting period
e. Merchandise may have been sold to customers who were bad credit risks
f. Unauthorized sales may have occurred
g. Sales may have been posted to the wrong account
h. Unauthorized write-offs of receivables may have occurred
2. Begin with the list of assertions below and add others you think appropriate. Then write your audit
program to test those assertions.
a. None of the accounts receivable are fictitious
b. No accounts receivable has been omitted from the balance sheet
c. The accounts receivable are collectible in the normal course of business
d. The accounts receivable are bona fide claims owed the company
e. Pledged accounts receivable or accounts receivable used as collateral are all disclosed.
f. Receivables from directors, officers, and affiliates are all separately disclosed.
3. Study the prior year’s working papers, schedules B-1 through B-5. Note the use of “tick marks” to
evidence the audit work and the system of cross-referencing the working papers. Perform all
required audit work on schedules B-1 through B-6 and prepare schedule B-7 to analyze the
allowance account for the current year (2011), performing all appropriate audit work. You have
determined that the expected uncollectible percentages from the prior year are still appropriate for
the current year.
PREVIOUS YEAR (2010) WORKING PAPER
CONFIRMATION REPLIES – PREVIOUS YEAR (2010)
-----------------------------------------------------------------------------------------------------------------------------------------CONFIRMATION OF ACCOUNTS RECEIVABLE
B-2
Confirmation Request No. 1
Anderson, Odds, and Watershed
Certified Public Accountants
615 Big City Bank Building
Chicago, Illinois
Dear Sir,
The statement of our account showing a balance of $ 10,500 as of 31/12/2010 is correct except as
B-1
noted below.
Very truly yours,
Frankie’s Floral Fragrances,
James Whitemore
Chief Accountant
Date: January 15, 2011
Exceptions:
No exceptions
-----------------------------------------------------------------------------------------------------------------------------------------CONFIRMATION OF ACCOUNTS RECEIVABLE
B-3
Confirmation Request No. 2
Anderson, Odds, and Watershed
Certified Public Accountants
615 Big City Bank Building
Chicago, Illinois
Dear Sir,
The statement of our account showing a balance of $ 840 as of 31/12/2010 is correct except as noted
B-1
below.
Very truly yours,
--------------Date: ________________
Exceptions:
Confirmation to Kanine Kaffiures returned by post office unopened. Should write off as bad
debt. Ref B-1 for proposed AJE
------------------------------------------------------------------------------------------------------------------------------------------
CONFIRMATION OF ACCOUNTS RECEIVABLE
B-4
Confirmation Request No. 3
Anderson, Odds, and Watershed
Certified Public Accountants
615 Big City Bank Building
Chicago, Illinois
Dear Sir,
The statement of our account showing a balance of $ 56.250 as of 31/12/2010 is correct except as
B-1
noted below.
Very truly yours,
Tears and Doefall Company
William O’Keeefl
Chief Accountant
Date: January 18, 2011
Exceptions:
Traced $43,000 of this amount to January collection recorded in cash receipts journal.
B-1
-----------------------------------------------------------------------------------------------------------------------------------------CONFIRMATION OF ACCOUNTS RECEIVABLE
B-5
Confirmation Request No. 4
Anderson, Odds, and Watershed
Certified Public Accountants
615 Big City Bank Building
Chicago, Illinois
Dear Sir,
x
The statement of our account showing a balance of $ 11,750 as of 31/12/2010 is correct except as
B-1
noted below.
Very truly yours,
William’s Fragrance
William Brown
Chief Accountant
Date: January 21, 2011
Exceptions:
No exception
x traced $9,000 of this amount to January collection recorded in cash receipts journal.
B-1
------------------------------------------------------------------------------------------------------------------------------------------
CONFIRMATION OF ACCOUNTS RECEIVABLE
B-6
Confirmation Request No. 5
Anderson, Odds, and Watershed
Certified Public Accountants
615 Big City Bank Building
Chicago, Illinois
Dear Sir,
x
The statement of our account showing a balance of $ 11,250 as of 31/12/2010 is correct except as
B-1
noted below.
Very truly yours,
Young and Beautiful
Roger M Adams
President
Date: January 15, 2011
Exceptions:
No exception
x Traced $11,250 to January collection recorded in cash receipt journal. B-1
----------------------------------------------------------------------------------------------------------------------------------------Apple Blossom Cologne Company
Allowance for Bad Debts
December 31, 2010
B-5
22-1-2011
Prepared by: Denies
Balance per 31-12-2010
2009 Write –off
12,250
10,850
1,400
99,257 WTB – IS
11,325 WTB – BS
840
10,485 (current balance)
2010 Provision
Balance per 31-12-2010
Adjustment # 1
Adjusted Balance
PROVISION FOR BAD DEBTS REASONABLENESS TEST
Age
Amount
1 – 30 days – see B-1
30 – 60 days – see B-1
60 – 90 days – see B-1
Over 90 days – see B-1
91,876
18,057
14,088
0
Expected
Uncollectible (%)
1.5%
10%
50%
100%
Balance per analysis
Adjusted balance
Estimated
Uncollectible
1,378
1,806
7,044
0
10,022
10,488
WTB – BS
Adjusted
Notes:
1.
2.
3.
4.
Beginning balance agree to prior year’s working paper
All bad debt write off are approved
Provision for bad debts appear reasonable and in line with prior year
Allowance balance is in line with prior year and appear reasonable based upon above
reasonableness test.
5. Over 90 days: $840-840 = 0, see B-1/AJE # 1
CURRENT YEAR (2012) WORKING TRIAL BALANCE
Apple Blossom Cologne Company
Working Trial Balance - Balance Sheet
December 31, 2011
Code
- WTB - BS
Accounts
1 ASSETS:
2
101 Cash - Big City Nat'l Bank
3
103 Cash - Second Nat's Bank
4
104 Petty Cash
5
105 Accounts Receivable
6
106 Allowance for Bad Debts
7
107 Miscellaneous Receivables
8
109 Inventory
9
110 Prepaid Insurance
10
111 Prepaid Rent
11
112 Office Supplies Inventory
12
113 Small Tools Inventory
13
115 Marketable Securities
14
116 Allowance to NRV
15
210 Land
16
220 Buildings
17
221 Acc. Depr. - Buildings
18
230 Machineries & Equipments
19
231 Acc. Depr. - Mach. & Equip.
20
240 Automotive Equipment
21
241 Acc. Depr. - Auto. Equipment
22
250 Office Furnitures & Fixtures
23
251 Acc. Depr. Furn. & Fictures
24
Total Assets
25
W/P Per Audit
Ref.
12/31/10
Per Books
Adjustments
12/31/11 Debit
Credit
375,090
5,265
420
124,021
(10,485)
272,765
46,315
500
238,850
(11,455)
777,152
31,438
5,000
6,125
4,750
426,140
596,701
54,612
1,250
7,432
4,129
664,220
80,250
276,263
(65,416)
540,845
(160,866)
99,425
(50,798)
106,433
(37,581)
2,533,471
82,250
276,263
(74,625)
735,445
(185,899)
113,925
(79,467)
113,233
(43,073)
2,813,371
Reclassification
Debit
Credit
Per Audit
12/31/11
LIABILITIES
1
301
2
302
3
303
4
304
5
305
6
306
7
307
8
308
9
330
10
401
11
450
EQUITY
1
2
3
4
5
501
505
601
605
610
Accounts Payable
Accrued Payroll Taxes
Wages & Salaries Payable
Accrued Property Taxes
Accured Interest
Dividends Payable
Fed. Income Tax Payable
Notes Payable - Short Term
Lease Obligation - Short Term
Notes Payable - Long Term
Lease Obligation - Long Term
Total Liabilities
Common Stocks
Other Contributed Capital
Retained Earnings
Dividends
Current Net Income
Total Equities
Total Liabilities & Equity
223,161
66,860
43,194
13,463
10,625
15,725
4,402
125,000
203,780
53,056
19,399
10,000
18,500
25,000
200,000
502,430
529,735
925,000
553,027
409,164
(15,725)
159,575
2,031,041
2,533,471
925,000
553,027
553,014
(18,500)
271,095
2,283,636
2,813,371