You are the in-charge auditor for Mittens Inc., a publicly traded company. The company went public last year and this is the second year that you have performed the audit. The company sells mittens both online via credit cards and to large retailers such as department stores and accessory shops. There are approximately 800 online customers and 50 retail customers.
Last year, there were many errors and adjustments to the financial statements. The management of the company is very focused on growing the company and has not had time to develop controls and procedures. Management does not believe in wasting time and effort to put in controls that they perceive to be administrative and burdensome. Due to significant turnover, the accounting department now has only 5 employees. As a result, duties are not segregated and employees perform most of the tasks without review or approval. In addition, employees work significant overtime and have not performed tasks such as cash collections and reconciliations.
Management is struggling to raise debt financing and needs to show good growth and strong financial ratios. The mitten industry is slowing down due to the warmer climate change worldwide and the increase in glove sales. They have chosen aggressive accounting policies to optimize the company’s performance.
You are responsible for auditing the accounts receivable, revenues and inventory for the company. Details of select GL accounts are listed below:
| Year 2 | Year 1 | |
| Accounts Receivable | $3,500,000 | $1,790,000 |
| Allowance for Doubtful
Accounts |
(400,000) | (400,000) |
| Inventory | 915,000 | 310,000 |
| Revenues – Retailers | $8,030,000 | $7,500,000 |
| Revenues – Online | 950,000 | 1,100,000 |
Required
- a) What audit approach would you use to audit revenues and accounts
receivable and inventory? Justify your response. (5 marks)
- b) Based on your answer in part (a), list four (4) audit procedures, which are
not analytical procedures (analytics), that you would perform to audit the
Allowance for Doubtful Accounts (4 marks)
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