Mgad10 Case 2 Cfi

To: Partner

From: CPA, CA/CGA/CMA

Re: Discussion of audit procedures and internal control deficiencies

Accounts Receivable Testing

The inherent risk and audit risk of completeness and valuation and allocation are high because:

* It is not appropriate to test the customers’ s response rate for the purpose of confirmation testing.

* According to the sample, only 35.49% ($62100/$175000) of the total amount has been tested. Large amounts such as $35000 (Worley), and $74000 (Donatello) are not selected.

* Based on the purpose, additional confirmation should be sent to Worley and Donatello. Moreover, we should check the invoice of Worley and Donatello, which is the way to enlarge sample size.

* The valuation and allocation test is not effective because confirmation test did not offer evidence to support valuation and allocation test.

* Based on the purpose, for overdue that is over 90 days (Q-Mart), we need more tests such as check the invoice to ensure that the payment is actually received. If it is not, we should consider whether to put the amount into bad debt expense, based on estimations.

Inventory

The inherent risk and control risk of completeness and valuation and allocation is high because:

* There is only the sheet-to-floor test for existence testing. However, it is not effective for completeness testing. Based on the purpose, the floor-to-sheet test should also be preformed.

* There is a large shipment arrived when we were counting so we cannot check it until they finish the sorting. Based on the purpose, the floor-to-sheet test should also be performed for the new arrival shipment to make sure it is shown on the invoice record for completeness.

Research and development cost

The inherent risk of classification, valuation and allocation, and completeness is high because:

* The expense of developing Espresso-Matic should be capitalized and amortized in the future. The development costs can be capitalized because it...