Background - The Auditor and the Audit Client

Infinity Auditors are Certified Practicing Accountants who are registered company auditors. They service a broad range of clients across Australia however they are known for their work within the medical and pharmaceutical industries. Established in 1986 the firm consists of 8 partners, 50 audit staff and 10 administration staff. You have been an audit senior with Infinity Auditors for 3 years. Infinity Auditors have two offices located in Adelaide and Brisbane.

During the year Infinity Auditors was approached by Medical Services Group Limited (MSG) to complete their 2020 financial year audit. Their financial year ends June 30 and the previous auditor was ABC Auditors. MSG supplies medical equipment to hospitals and doctor surgeries including medical diagnostic testing units, disposable products for surgery and medical safety equipment. They sell a total of 230 stock items ranging from $50 an item to $50,000 an item. They have warehouses in Sydney, Melbourne and Adelaide but ship their products all over Australia. Recently MSG opened another warehouse in Brisbane bringing the total number of warehouses to four. The head office is in Adelaide, and this is where most of the administration staff are located.

You have engaged MSG as a client and have started the independent audit of MSG's financial statements.

You have been asked to circulate the receivable confirmations to MSG's debtors. These letters seek to confirm the balances that MSG has in their accounts with that of its customers. On June 30, 2020 the Accounts Receivable balance is $3,980,250 and is considered material.

MSG's payment terms are 14 days from the date of the invoice. Sixty per cent of the balance is represented by invoices outstanding from five different medical practitioners. The remaining forty per cent is made up of numerous smaller amounts, most of which have been outstanding for more than 60 days. Any allowance for doubtful debts is taken directly against the trade receivables account and not shown separately in the balance sheet.

a. Discuss the strength and weaknesses of debtor confirmations as audit evidence for MSG. Include the deficiencies in the accounting system and accounts receivable process in your answer.

b. Is it possible for Infinity Auditors to use debtor confirmations as the only audit evidence?