Lawrence & Harcourt (L&H) was the world's leading provider of speech recognition technology products, solutions, and services to businesses and individuals worldwide. Both Microsoft and Intel invested millions in L&H. However, accounting scandals and fraud allegations sent the company's stock crashing and forced the firm to seek bankruptcy protection in France and the United States. The following selected information pertains to L&H's sales and accounts receivable: Consolidated revenue increased 184 percent from the 1997 fiscal year to the 1998 fiscal year. Revenue in Singapore, which has a reputation as a difficult market for foreign companies to enter, increased from $97,000 in the first quarter of 1999 to approximately $59 million in the first quarter of 2000. In the second quarter of 2000, sales grew by 104 percent but accounts receivable grew by 128 percent. Average days outstanding increased from 138 days in 1998 to 160 days for the six-month period ended June 30, 2000. L&H's auditor did not confirm accounts receivable from customers in Singapore. However, The Wall Street Journal contacted 18 of L&H's Singaporean customers and learned the following: -Three out of 18 customers listed by L&H stated that they were not L&H customers. -Three others indicated that their purchases from L&H were smaller than those reported by L&H
Questions:
1. How would you rate the risk of material misstatement for revenue and receivables? Explain.
2. Do you believe that the auditors had justification for not confirming receivables? Explain.
3. Assume that after obtaining the information about the Wall Street Journal’s findings, the auditors decide to confirm receivables. Explain the procedures that they should follow in the confirmation process. In your responses ensure that you address the following:
• The type of confirmations
• Sample sizes
• Steps they should take to ensure reliability of their confirmation results.
• Follow up procedures (if any) that should be done in the case of none response
• Steps that should be taken in case of confirmations returned showing discrepancies.