Case 04-1 Total Computer, Inc. Tim Jacobs (Audit Manager) was reviewing the working papers for Total Computer, Inc., a large, privately owned retailer of computer hardware in the United States. Tim is on site at the client’s headquarters and has only two sections to review: inventory reserves and accounts receivable. Inventory Reserves While reviewing the inventory working papers of Total Computer, Inc., Tim focused on the lower of cost or market (“LOCOM”) inventory reserve, which had been identified as an area of audit risk. The working papers included a schedule prepared by the client showing beginning and ending balances, write-offs, and the current-year provision. Sarah Byrd (Audit Staff) summed the schedule and traced the ending LOCOM
While reviewing the accounts receivables section of Total Computer, Inc., Tim Jacobs (Audit Manager) noted that the working papers stated that the balances confirmed on Examples 1-4 were “confirmed without exception,” Example 5 had a discrepancy, and alternative procedures were performed on the “no reply” confirmation (Example 6). Tim asked Sarah (Audit Staff) to explain the discrepancy in Example 5. Sarah explained the discrepancy as follows: Betty Bingham (Controller) mentioned that although the typical terms do not allow a customer to return product, except for warranty purposes, this customer had returned a large number of first quality items during the first week of October. This resulted in a proposed audit adjustment in our summary of misstatements as of 9/30/XX. The sixth confirmation, mailed to Dot.Bomb, Inc. (Total Computer, Inc.’s largest customer), was not returned. As a result, alternative procedures were performed, which included examining subsequent cash receipts and the contract. The cash receipts collected as of November 15 (latest available date) totaled exactly half of the amount recorded in the accounts receivable balance as of September 30, 20XX. The working papers stated:

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Case 04-1: Total Computer, Inc.

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Based on our review of cash receipts through November 15, the customer has paid half of the balance owed as of September 30. Per discussion with the