Mattel’s auditors, Arthur Andersen, sent accounts receivable confirmations. The confirmations were returned with discrepancies in what the customers claimed and what Mattel booked. To resolve the discrepancies, the auditors obtained copies of bills of lading to determine whether goods had actually been shipped. Even though the bills of lading were stamped “bill and hold,” the auditors never asked Mattel to explain the phrase. Furthermore, the bills of lading lacked the required routing or delivery instructions. 

The employee signatures as themselves and common carriers did not get noticed. (SEC 1981) When the auditors looked at fiscal 1972 they found the $7 million reversing entry that caused that month’s general ledger sales to be $7 million less than the sales figure in the corresponding sales invoice register. The staff auditor accepted the explanation of a Mattel employee that the offset to sales was due to “invoicing errors” uncovered by Mattel employees when comparing computer-prepared invoices to bills of lading. The Andersen senior reviewing the work papers wrote the staff person, “Need a better explanation. This looks like a big problem,” but the problem was investigated no further. (Knapp 2001) Had Arthur Anderson utilized analytical procedures to evaluate the overall reasonableness of Mattel’s monthly sales, they should have discovered that monthly sales varied dramatically from 1970 to 1972. This was a result of errors introduced by the bill and hold scheme and the subsequent reversals.

Discussion Questions 

■ What alternative audit procedures could the Andersen auditors perform when (or if) they found the inconsistencies in conformations and bills of lading? 

■ Why do you think the staff auditor accepted the explanation of the $7 million discrepancy by the Mattel employee? 

■ Why was it not followed up?

Answer rating: 100% (QA)

ANSWER 1 Auditors evaluating financial statements routinely ask audited companies to confirm the truth of items in the statement If the auditor cant get an answer then alternative confirmation methods ... View the full answer