Auditing Canceled Ticket Sales

Ticket sales are “booked” over the internet and an entry is made debiting a receivable account (from the credit card) and crediting sales.

When a ticket is canceled, the only entry made is to a database that maintains specific seat availability.

Customers are emailed a “Cancellation Form” when this occurs.

No accounting journal entry is recorded, and no refund occurs until the customer requests (in writing) a refund.

If the customer never requests the refund, the receivable is billed to the credit card and collected.

After it is billed to the credit card, many customers complain and are given a refund, and then an accompanying journal entry is made for the cancellation.

After analyzing the “Canceled Form”, you note that it says nothing about requiring a written cancellation for a refund.

The internal controller responded to your inquiry about the policy of requiring a written request for a refund by indicating that the policy is presented on the website’s “business policies and procedures” section.

The controller says that in total about two-thirds of the customers ask for and receive refunds, while one-third do not.

The CPA’s attorneys say that while it is probably a questionable policy, they are unable to say it is illegal—in fact, it probably is not.

1. Is this a significant deficiency and should it be reported to the audit committee?

2. Should it be reported elsewhere? Where? How?

3. What impact should this policy have on the audit?