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You are engaged to perform an audit

Accounting

You are engaged to perform an audit. The controller tells you that they are too busy to shut down production for you to perform test counts of inventory. They are happy to provide you with any other information you need, but they cannot have production interrupted close to year-end. Inventory is material and though you perform cutoff tests, sales and purchase tests, and shipping tests, you do not feel the evidence is sufficient to conclude the balance is fairly stated.

During receivables testing, you note that the client does not have a reserve for bad debts. Based upon the aging schedule, you conclude an allowance of $17,000 should be recorded for the $450,000 of receivables. However, after speaking with management, they inform you that they have not had a bad debt in 12 years, and they prefer to use the direct write-off method. They will not consider making the audit entry. There were no issues during the rest of the audit, and, in all other areas of the audit, you feel there was sufficient appropriate evidence to justify the reasonableness of the financial information.  

  1. What concerns would you have related to inventory and receivables?
  2. Based on your testing and discussions with management, what type of audit report would you issue?
  3. Why did you choose that type of audit report? Explain why that report is appropriate given each of the two areas where issues were noted.

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