King Companies, Inc. (KCI) is a private company that owns fiveauto parts stores in urban Los Angeles, California. KCI has gonefrom two auto parts stores to five stores in the last three years,and it plans continued growth. Eric and Patricia King own themajority of the shares in KCI. Eric is the chairman of the board ofdirectors and CEO of KCI, and Patricia is a director as well as theCFO. Shares not owned by Eric and Patricia are owned by friends andfamily who helped the Kings get started. Eric started the companywith one store after working in an auto parts store. To date, hehas funded growth from an inheritance and investments from a fewfriends. Eric and Patricia are thinking about expanding by openingthree to five additional stores in the next few years.
KCI employs 20 full-time staff. These workers are employed in storemanagement, sales, parts delivery, and accounting. About 40% ofKCI’s business is retail walk-in business, and the other 60% ismade up of regular customers for whom KCI delivers parts to theirlocations and bills these customers on account.
During peak periods, KCI also uses part-time workers.
As part of gaining an understanding of KCI, you inspect (1) theaccounts receivable trial balance that lists amounts owed by eachcustomer and (2) an aging of accounts receivable schedule. Onecustomer, Tire Repair Specialists (TRS), has a large materialbalance that is more than 90 days past due. You discuss the TRSbalance with Jonathan, one of KCI’s accounting staff, and he saysthere are rumors that TRS is having serious financial difficulty.Jonathan says no adjustment or allowance has been made regardingthe TRS account.
You just completed a continuing professional education (CPE) courseat your firm, Thornson & Danforth, about audit documentation.AU-C 230 has specific requirements about documenting audit work. Inparticular, paragraph 9 states:
“In documenting the nature, timing and extent of auditprocedures performed, the auditor should record:
a. the identifying characteristics of the specific items or matterstested;
b. who performed the audit work and the date such work wascompleted; and
c. who reviewed the audit work performed and the date and extent ofsuch review.”
“The auditor shall document discussions of significant findingsor issues with management, those charged with governance, andothers, including the nature of the significant finding or issuesdiscussed, and when and with whom the discussions tookplace.”
Describe how you would apply the mandatory requirements ofAU-C 230 when documenting your understanding related to thepotential bad debt. ??
