Chem Inc., a public company, manufactures pesticides and other chemical products and has its main manufacturing facilities in the United States. Chem does business primarily with other U.S. companies; however, the company is contemplating expanding its operations overseas.

Johnson \& Smith, CPAs, are Chem Inc.'s auditors and have assigned Jean Davis to be in charge of the current audit engagement. It is Davis's responsibility to plan and conduct the audit. Davis reviewed past and current financial statements and prepared the following worksheet.

While examining the company's preliminary 19X9 statement of financial position, Davis noted that the accounts receivable balance had increased substantially. The balance of \(\$ 6,250,000\) represents 25 percent of total assets and 45 percent of current assets. A review of accounts receivable and the revenue cycle indicated that internal control was adequate. However, Davis is concerned about this increase in accounts receivable and the increasing slowness in customer payments.
Based on an assessment of control risk and analytical procedures, Davis chose to use positive confirmations for all accounts receivable balances over \(\$ 5,000\) and a random sampling of the smaller account balances. Because of the significance of accounts receivable to the financial statements taken as a whole, Davis decided to confirm at least 90 percent of the amounts due. First and second confirmation requests were mailed. Any discrepancies received were resolved, and the following statistics are available for the confirmed accounts receivable.

An examination of the unconfirmed accounts receivable balances at May 31, 19X9, revealed the following amounts by major customer.

Management provided Davis with the following data for the allowance for doubtful accounts at May 31, 19X9.

Management indicated that all known uncollectible accounts had been written off in accordance with company policy, and the provision for uncollectible accounts was adequate.
Burt Johnson, the partner in charge of the audit engagement, is planning to visit Davis and review the progress of the audit. Davis continues to be concerned with the audit work done to date on accounts receivable and the results that have been presented above, and intends to discuss this matter with Johnson.
Required:

a. List five audit objectives (assertions) for auditing accounts receivable.

b. With respect to accounts receivable, identify four additional audit steps Jean Davis needs to perform so that she may be able to recommend an unqualified opinion for the Chem Inc. financial statements dated May \(31,19 \times 9\).

c. Explain the operational significance of the unconfirmed accounts receivable balances at May 31, 19X9.

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Chem Inc. Operating Results for the Years Ended May 31 ($000 omitted) 19X6 19X7 19X8 19X9 (Preliminary) Sales $12,000 $12.500 $8.500 $7.600 Cost of goods sold 6,000 6,500 6.000 6.500 Gross profit 6,000 6,000 2,500 1.100 Expenses 2,400 2,400 1,200 800 Operating income $3,600 $3,600 $1,300 $300