You are engaged in your first audit of the Licitra Pest Control Company for the year ended December 31, 2003. The company began doing business in January 2003 and provides pest control services for industrial enterprises.

Additional Information:

1. The office staff consists of a bookkeeper, a typist, and the president, Angela Licitra.

In addition, the company employs 20 pest controllers on an hourly basis who are assigned to individual territories to make both monthly and emergency visits to customers’ premises. The pest controllers submit weekly time reports that include each customer’s name and the time devoted. Time charges for emergency visits are shown separately from regular monthly visits on the report.

2. Customers are required to sign annual contracts, which are prenumbered and prepared in duplicate. The original is filed in numerical order by contract anniversary date, and the copy is given to the customer. The contract entitles the customer to pest control services once each month. Emergency visits are billed separately.

3. Fees for monthly services are payable in advance—quarterly, semiannually, or annually—and are recorded on the books as “income from services” when the cash is received. All payments are in the form of checks received by mail.

4. Prenumbered invoices for contract renewals are prepared in triplicate from information in the contract file. The original invoice is sent to the customer 20 days prior to the due date of payment, the duplicate copy is filed chronologically by due date, and the triplicate copy is filed alphabetically by customer. If payment is not received by 15 days after the due date, a cancellation notice is sent to the customer, and a copy of the notice is attached to the customer’s contract.

The bookkeeper notifies the pest controllers of all contract cancellations and reinstatements and requires written acknowledgment of receipt of such notices.

Licitra approves all cancellations and reinstatements of contracts.

5. Prenumbered invoices for emergency services are prepared weekly from information shown on pest controllers’ time reports. The customer is billed at 200 percent of the pest controller’s hourly rate. These invoices, prepared in triplicate and distributed as described, are recorded on the books as “income from services” at the billing date. Payment is due 30 days after the invoice date.

6. All remittances are received by the typist, who prepares a daily list of collections and stamps arestrictive endorsement on the checks. A copy of the list is forwarded with the checks to the bookkeeper, who posts the date and amount received on the copies of the invoice in both the alphabetical and chronological files. After posting, the copy of the invoice is transferred from the chronological file to the daily cash receipts binder, which serves as a subsidiary record for the cash receipts book. The bookkeeper totals the amounts of all remittances received, posts this total to the cash receipts book, and attaches daily remittance tapes to the paid invoices in the daily cash receipts binder.

7. The bookkeeper prepares a daily bank deposit slip and compares the total with the total amount shown on the daily remittance tapes. All remittances are deposited in the bank the day they are received. (Cash receipts from sources other than services need not be considered.)

8. Financial statements are prepared on the accrual basis.

Required:

a. List the audit procedures you would employ in the examination of the Income from Services account for 2003.

b. You are considering using the services of a reputable outside mailing service for the confirmation of accounts receivable balances. The service would prepare and mail the confirmation requests and remove the returned confirmations from the envelopes and give them directly to you. What reliance, if any, could you place on the services of the outside mailing service? State the reasons for your answer.