Happiness Express Inc.
a) The primary audit objectives of confirming a client’s year-end accounts receivable include occurrence and accuracy of realizable value. Auditors would like to make sure that the transaction generating the accounts receivable actually occurs, and that the receivables are recorded at accurate value for the current reporting period. Usually they will send accounts receivable confirmations to client’s customers directly.
b) The primary audit objectives of performing year-end sales cutoff tests include accuracy and timing, since the purpose of year-end sales cutoff tests is to check whether revenues and/or receivables were recorded in the proper period or not. These tests usually involve a review of a selected sample of sales transactions occurring in the last few days of a fiscal year and the first few days of the following year.
2. Auditors of Coopers & Lybrand have made several mistakes in judgment when they tried to confirm the Wow Wee receivable at the end of fiscal year 1995. These mistakes include: Auditors informed Goldberg that Wow Wee was chosen for confirmation, giving him the opportunity to provide an incorrect address. When auditors didn't receive the confirmation letter back from Wow Wee, they discussed with Goldberg and allowed him to contact Wow Wee in order to ensure the confirmation process. It gave Goldberg the opportunity to make fake documents. After the auditors received the faxed confirmation response, they accepted it directly without further verifying the source and content of the response. They didn't perform any follow-up procedures.
I would say most of these errors in judgment involve negligence. Fraud is harder to prove than negligence because fraud requires a “scienter” or an intent to deceive. In fact, it is difficult to prove that Coopers & Lybrand had a motive to issue a false audit opinion on Happiness Express’s financial statements. However, I would rather characterize the mistakes as...
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