Your professional career has commenced! You are the staff auditor for a CPA firm that audits Shear B

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Your professional career has commenced! You are the staff auditor for a CPA firm that audits

Shear Bliss, a firm that manufactures and sells the market-leading clippers. Until the past year, the company’s clippers were sold exclusively to commercial hair salons, and offered a three-year warranty on all products sold. In general, the beauty industry has been strong, even during the recession. However, Shear Bliss commercial customers were hurt when individuals who were impacted by the recession learned to cut their own hair at home. In order to improve sales, Del Vacuums introduced a ‘‘home version’’ of their clippers. This product is cheaper because it needs fewer metal parts and less substantial blades, casing, and cording. Home groomers typically use the clippers six to ten times each year, about as much as professional groomers use the clippers in a single day.

ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

You have been assigned to audit a routine management estimate: the allowance for

uncollectible accounts. The client has provided the lead sheet, and a member of your audit staff, who was pulled to work on another job, has completed the audit program and gathered

considerable evidence regarding the estimate. Your job is to review the evidence and conclude

about the reasonableness of the client’s estimate.

Prior to reviewing the evidence, refresh yourself on how to the account for bad debts. After all, it is your job to ensure that the client’s financial statements are presented in accordance with GAAP, so you must be familiar with current GAAP to perform the audit. You are now ready to proceed to review the lead sheet, a listing of the balances under audit, and the evidence gathered presented in Exhibit 1.

Required

1. Identify the evidence that supports the estimate. What facts, tests, or balances indicate that

management’s accrual is reasonable? That is, what evidence supports the accrual?

Defend your choices.

2. Identify the evidence that contradicts the estimate. What facts, tests, or balances indicate

that the accrual may not be reasonable? That is, what evidence is ‘‘disconfirming,’’

indicating that an audit adjustment may be needed? Defend your choices.

3. Identify the irrelevant evidence (neither supports nor contradicts the estimate). What facts,

tests, or balances are irrelevant or not helpful in determining the reasonableness of the

allowance for uncollectible accounts? Defend your choices.

4. Balance the persuasiveness of the supporting evidence against the persuasiveness of the

contradictory evidence. Overall, rate the reasonableness of management’s estimate on a

scale of 0–10, with 10-very reasonable and 0-not reasonable at all. Defend your rating.

5. What other evidence would you gather, if any?

  • Exhibit 1: Shear Bliss Inc. Allowance for Uncollectible Accounts Audit Evidence

Accounts Receivable Lead Sheet

This Year Last Year Change

Accounts receivable $ 170,456 $161,933 5.3%

Allowance for uncollectible accounts $ (21,375) $(20,663) 3.4%

Examine the fairness of this amount

Other General Ledger Activity

This Year Last Year Change

Sales.    $1,943,198 $1,878,425 3.4%

Bad Debt Expense $23,513 $22,729 3.4%

Account write offs $ 26,600 $ 21,970 21.1%

Account recoveries $ 3,800 $ 313 1114.1%

Bad debts as a percent of sales 1.21% 1.21%

Client policy for Uncollectible Accounts

Client explanation of Accounts Receivable estimates:

Accounts Receivable Aging Schedule

This Year

Last Year

Change

Current

$ 141,478

$ 136,024

4.0%

30-60 days

$ 6,818

$ 11,335

-39.8%

61-90 days

$ 10,227

$ 12,955

-21.2%

Over 90 days

$ 11,932

$ 1,619

637.0%

Total

$ 170,456

$ 161,933

5.3%

Client policy for Uncollectible Accounts: Shear Bliss Inc. uses the percent of sales method for accruing uncollectible accounts. The current policy is to accrue 1.21% of sales as bad debt expense. This percent is reviewed periodically.

Client explanation of Accounts Receivable estimates:
Shear Bliss Inc. generally accrues a steady 1.21% across years, even if their write-offs are a bit haphazard, with some years showing a surge and some years showing little activity. They continue to accrue a steady amount to smooth out the surges and lulls in write offs. There was a flurry of write offs at the end of the current year due to customers of the new P-19 product line being unable to pay. These customers have been put on COD shipping terms.

Audit Confirmations:
Positive audit confirmations were sent to all over 90-day invoices without exception. Negative audit confirmations were sent to a sample of current through 90-day invoices. One customer disputed the amount and the dispute was resolved by vouching the sales return that accounted for the confirmation difference.

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