AUDITING ACCOUNTS RECEIVABLE - 17 marks Background Information - Use this background information to answer questions 1 - 4 below. It is August 9. You are auditing Car Parts Inc., a business that sells car parts to auto repair shops in Eastern Ontario. The company is owned and operated by Sheila Wilson and her husband, Thomas Williams. The company has about $20 million in sales and at year end the Accounts Receivable balance is $1,264,75.25. The company sells on a net 30-day payment term. The company follows ASPE. The company uses the balance sheet approach and an aging report of the accounts receivable balances when estimating the allowance for doubtful accounts. The company's yearend is June 30. Your audit firm calculated materiality as $20,000. You inspect the Accounts Receivable Listing and identify seven (7) accounts that have a balance owing of $20,000 or more. You notice twelve (12) accounts totalling $112, 693.50 are one hundred and twenty (120) days or more past due. You have been told by your senior manager to ask the Accounting Manager any questions you might have about the accounts receivable balance. The Accounting Manager has been a long-time employee of the company and as always been cooperative with the auditors. Based on this information answer the following questions: QUESTION 1 -2 marks Would you select for testing all seven (7) accounts over $20,000 or just a few of them? Why or why not? 2 marks QUESTION 2 - 9 marks When you enquire with the Accounting Manager about the twelve (12) accounts that are one hundred and twenty (120) days overdue, the Accounting Manager tells you that all twelve (12) accounts are collectible because they are long term customers with no history of failing to pay their balances in full. (i) What level of reliability would you place on the answer given by the Accounting Manager? 2 marks (ii) Explain two (2) additional audit steps that you perform based on the Accounting Manager's explanation that the accounts will be collectible. Consider the background information provided. Do not use enquiry as an additional audit step to answer this question. 2 marks (iii) What assertions are you testing when performing the steps identified in your answer in (ii) above. Identify one assertion per each step described in (ii) above. 2 marks (iv) After performing the steps you identified in (ii) above, you determine that two (2) accounts receivable balances may not be collectible. What accounts might be adjusted for these two (2) balances that may not be collectible? Explain in terms of which accounts(s) would be debited and which account(s) will be credited. 2 marks (v) Explain how understanding the nature of the client's customers will help you determine if an adjustment should be proposed for any accounts that are long overdue, i.e., greater than one hundred and twenty (120) days. 1 mark