Reference no: EM132574716
You are the audit senior for the 2019 year-end audit of Clearly Contacts (CC), a publicly traded Canadian company, that is one of the largest and fastest on-line vision care providers in the world. Because of the efficiencies of the Internet to bypass middlemen, CC has a significant competitive advantage in its market.
You are responsible for auditing the revenue cycle. Performance materiality for the CC audit is $100,000. CC's year-end is October 31, 2019.
Below is a summary of key information regarding the revenue cycle:
Revenue Recognition Policy - Revenue from product sales is recognized when the product has been shipped to the customer. At that point, the amount of sales revenue is determinable, no significant vendor obligations remain and the collection of the revenue is reasonably assured. A provision is made for product returns. Revenue collected in advance of the product being shipped is deferred. Most customers do not keep track of their accounts payable.
Audit Strategy for Revenue - The audit strategy relies upon tests of controls, (including substantive tests of transactions), and substantive analytical procedures. There are no accounts receivable confirmations sent out. Your audit team has tested controls related to revenue transactions and concluded that controls are effective and support the control risk assessment of low for the revenue transaction-related assertions.
Change in Credit Policy - When reviewing the accounts, you noted that a new account, allowance for doubtful accounts, has been set up. Upon investigation, you find that in February 2019, CC implemented a program where the majority of customers were granted credit. CC developed this program to attract new customers who might be wary of ordering contact lenses from an on-line retailer and having to pay for them prior to receiving them. The company's program, named "Invoice Me Later, or IML, allows customers to order from CC and pay after receiving the product. Management estimates payment should be generally received in less than 15 days.
Estimate for Allowance for Doubtful Accounts - The majority of the balances outstanding are less than $150 and there are a large number of records. Management estimates an allowance based upon the aging of the receivable portfolio. Below is a summary of the aging and management's estimate for the allowance for doubtful accounts.
Aging of Accounts Receivable
2019 2018
Current $ 7,714,000 $ 6,695,000
Aged between 60 -120 days 88,000 nil
Aged greater than 120 days 66,000 nil
Total Receivables $7,868,000 6,695,000
Allowance for Doubtful Accounts 135,000 nil
Net Receivables 7,733,000 6,695,000
Required
Question 1: If the auditors planned to send out accounts receivable confirmations, what type of confirmations would you recommend? Explain why.