Required:

(a) Identify and explain any deficiencies in the debtor circularization process.
(1) The Draft Letter does not provide Trade Debtors with genuine authorisation to release Trade Debtors Balances to third parties Information regarding CSBs trade debtors balance is considered privileged. As such, CSBs trade debtors require genuine authorisation from CSB before releasing information about their balances to Jean & Phil CPA. (Since Jean & Phil as auditors are external third parties not involved in the trade transactions between CSB & their trade debtors) The circularization letters should hence be prepared in a manner that conveys such authorisation has been granted by CSB. This is suggested by the latest Audit Guidance Statement (AGS 2) on Verification of Debtor Balances - Confirmation by Direct Communication issued by the Institute of Certified Public Accounts of Singapore's Centre for Auditing and Assurance, which states that Circularisation is essentially an act of the client, who alone can authorise third parties to divulge information to the auditor.(Annex A). The draft letter written by the audit assistants does not achieve this effect. To correct this, the following changes will have to be made. The circularization letter should thus: (i) (ii) (iii) Bear CSBs letterhead instead of Jean & Phils. Be signed off by an appropriate authority from CSB (finance controller or someone of sufficient authority and responsibility) Be worded from CSBs perspective (e.g. We are now auditing the financial statements of CSB should be re-written as Our financial statements are currently being audited by the auditing firm, Jean & Phil Certified Public Accountants)

Performing these changes lends credibility to the letters assertion that genuine authorisation has been granted to CSBs trade debtors to release the relevant information required to Jean & Phil. This increases Jean & Phils chances of receiving replies, in comparison to the current draft letter which is deficient in this regard. (2) The Balance and Balance as at Date to be confirmed by trade debtors are not specified The reply slip on the circularization letter, which is a turnaround document, should state the balance (appropriate when using positive confirmation) and balance as at date (31 March 2008, CSBs Financial Year end date) for the debtor to confirm. Both are necessary as different companies may have different financial year ends, and debtors may hence confirm the amount owed as at a different date to what the auditor may be seeking. The draft negative confirmation circularization letters omission of these details does not allow trade debtors to determine the figure they are to confirm accurately and is thus deficient. (3) Circularization Letters should be addressed to the trade debtors Finance Manager This will increase efficiency and accuracy of the circularization process as the finance manager is in the best position to comment on the true amount they owe the client (CSB). This helps ensure that any reply (both positive or negative) is most credible. To gain assurance that the letter is directed to the finance manager, it could be indicated on the envelop itself that its intended recipient is the finance manager by stating, for example, ATTN : FINANCE MANAGER OF SUI BIEN SUPPLIES PTE LTD. (4) Circularization Letters should be sent earlier The draft letter suggests that circularization letters be sent on the 26th of April, which is close to a month after CSBs 31 March 2008 financial year end. Such a delay appears unwarranted and reduces the amount of time the auditors have to evaluate responses and investigate differences before the audit completion deadline. Thus, the circularization letters should be sent earlier. (5) The Draft Letter does not ensure that replies are sent directly to Jean & Phil CPA The draft letters turnaround document merely refers to Jean & Phil CPA and does not provide a return

address to the auditors. This may prompt trade debtors to send their replies to CSB for forwarding to Jean & Phil - providing CSB with a chance to manipulate their trade debtors replies. To remove this possibility, a return address should be provided on the circularization letter itself. A stamped self addressed envelope could also be provided. If so, it will further serve to increase the likelihood of receiving responses as it makes it more convenient for trade debtors to reply while ensuring that the confirmations are not tampered with. (6) The Negative Confirmation method is not the most reliable means of deriving assurance about a Trade Debtors stated balance It is not incorrect for the junior auditor to suggest using the negative confirmation method to derive assurance relating to the trade debtors balances of the debtors selected thus far. This is so as Audit Guidance Statement 2, Paragraph 7 states that: Both methods (positive and negative) may be used in conjunction with positive form used for large balances and the negative form for small balances (Annex B). However, the negative confirmation method is not the most reliable means to do so. This is because a no-reply will be viewed as a confirmed correct response, when there are many other possible reasons apart from trade debtors agreeing with balances that will cause a no-reply. These reasons include debtors not having received the circularization letter, not understanding the circularization letter, not bothering to go through the trouble to attend to the confirmation request, misplacing the letter or even not being in existence hence the no-reply. This is in contrast to the use of the positive or blank confirmation methods which prevent auditors from gaining false assurance that they have agreed to the balance. A no-reply situation in this case will procedurally prompt auditors to take further action to derive assurance about a trade debtors stated balance. These include engaging the audit clients assistance in getting responses, finding out why there is no response and resolving it, determining if circularization letters were sent to the wrong addresses or performing alternative procedures such as examining supporting documents (sales contracts, sales orders, delivery notes and invoices). Hence, the positive or blank confirmation methods provide more reliable assurance about stated balances and should be used instead. The use of the negative confirmation method also poses other assurance reliability issues assuming the trade debtors selected thus far are major customers of CSB, where there is a risk of their stated balances being understated. If either the positive or negative confirmation method is used, there is a risk that these debtors may conveniently confirm a balance thats truly understated to their own benefit. Hence, blank confirmation should be used instead. Thus, the more reliable positive or blank confirmation methods should be used instead. * A sample blank confirmation circularization letter with changes we have proposed has been included as Annex C.

(b) Comment on the deficiencies on the sample selection performed by the junior audit assistant.
Determining Materiality & Coverage of selecting clients trade debtors To give a better assurance that the total trade receivables are not materially misstated the aggregate balances of the selected trade debtors should be large enough to cover at least a certain percentage of the total account receivable balance as stated in the draft balance sheet, i.e. 10mil. This percentage would be determined during the audit planning stage based on the information provided by the audit client. However, based on the questions information, it would be difficult to make a judgement as to what is material since there is inadequate information provided. One way, for example, would be to ensure that 70% of the A/R account be selected for confirmation with the clients trade debtors, while ensuring that the customers selected for confirmation span across the different groups of customers eg. large customers, major customers, or customers who are likelier to default on their payments

Main deficiency of the sample selection: The samples chosen have a total debt balance that is Not Material Enough Total Balance of Debtors Selected inadequate From the samples of debtors selected, debtors A to E, the balance as at 31/3/2008 ranges from $10,000 to $12,000 per debtor, totalling $55,000. Compared to the total debtor balance in the draft balance sheet of $10 million, $55,000 is only 0.55% of the total balance. Estimated per debtor balance is $200,000 (derived from $10m divided by 50 debtors), further indicating that the total balance of trade debtors chosen are not material enough and does not offer enough coverage to provide reasonable assurance to the auditor that the remaining balance of trade debtors are free from material misstatements. Total number of debtors selected inadequate Furthermore, the junior auditor has selected only 5 debtors out of a list of 50 trade debtors. This could be too few to give an assurance on trade debtor balance and the junior audit assistant might want to include more samples to achieve better assurance and coverage. Therefore seeking confirmation from this set of samples alone is insufficient in itself to derive assurance regarding CSBs debtor balance as it does not provide enough coverage of the entire accounts receivable account. Nonetheless, confirmation could still be sent to these trade debtors as doing so helps derive assurance regarding the balances of trade debtors with individually immaterial balances and prevents the sampling criteria from being biased. Recommendation: According to AGS 2, It is seldom desirable to circularise all debtors and it is therefore necessary to establish an adequate sample, if this sample is to yield a meaningful result it must be based upon a complete list of all debtor accounts. Since there is quite a considerable number of debtors (50) and it may not be desirable to do a 100% examination, the junior audit assistant might want to consider selecting trade debtors from the following categories below to achieve coverage across the various types of trade debtors for audit assurance. Also, since the deficiency identified is that the balance of the selection set selected by the junior audit assistant does not form a significant proportion of CBS draft $10 million accounts receivables balance, the new selection set should have a balance that constitutes a significant portion of the $10 million. Debtors with individually large balances With regard to the case, the debtors selected have trade debt values ranging from $10,000 to $12,000. As the average amount owed to the client as calculated is $200,000 per client, it may be argued that there are likely to be other trade debtors of CBS who may owe trade debts of a material nature. As such, it would be wise to select some of these larger debtors for confirmation to test for any possible overstatement of balances belonging to these clients. Debtors who are major customers With major customers, there may be a higher risk of unrecorded transactions and hence unrecorded balances in the respective A/R accounts. As such, there could be a risk of understatement in these accounts belonging to the major customers as a result of a high number of transactions occurring between the audit client and the trade debtor. In order to minimize the risk of accounts receivable being understated, the audit team should choose to conduct debtors confirmation on major customers of CSB Pte Ltd to ensure that there is no understatement of these accounts. Debtors with balances that have been outstanding for a longer period of time The auditors should pick out clients whose debts have been outstanding for a longer period of time by reviewing the A/R aging report. This will help ascertain the A/R collectability as lengthy A/R that exist on CSB Pte Ltd A/R aging report might have the risk of being uncollectible, which may also give rise to risk of incorrect bad debt expense and allowances for doubtful debt accounts valuation. The reason for such uncollectible debts could be due to possible cash flow problems facing the clients trade debtors. Thus, to

give better assurances of the clients A/R accounts balances that are related to this group of customers, the auditor should pick out a few of these customers for confirmation. Debtors with unusual items on their accounts The junior audit assistant should also use his judgement and pick out any unusual phenomenon recorded on the trade debtor listing. Examples could include debtors with credit balances on the A/R, or that the trade debtor account may be astronomically large or minute. Any items that stand out should be checked and selected for confirmation to verify any possible misstatements, albeit based on the professional judgement of the auditor doing the selection. With regard to the above, the junior audit assistant should therefore group the various trade debtors accordingly and select trade debtors for confirmation purposes. Such a strategy would also ensure efficient coverage over the various types of trade debtors that CBS may have on their trade debtor listing.

Conclusion In all, the set of debtors selected by the audit junior assistant did not provide enough coverage to ensure sufficient audit assurance of the total debtor balance in the draft balance sheet. In our opinion, the way to rectify this deficiency is to ensure that trade debtors are selected using a method that best provides quantitative and qualitative coverage so as to offer reasonable assurance on CBS A/R accounts. Though we have recommended ways to improve the debtor selection process, it is important to note that debtor selection is but one part of the confirmation process, and that follow up action (such as following up on nonreplies and reconciling differences between CBS stated balances and those provided by its trade debtors) is just as important for assurance to be derived.

ANNEXES

Annex A Audit Guidance Statement 2 Verification of Debtor Balances - Confirmation by Direct Communication http://www.icpascaa.org.sg/standards/ags Para 6: The decision to request the client to carry out a test circularisation of debtors should not be construed as an assumption by the auditor of the directors duties. Circularisation is essentially an act of the client, who alone can authorise third parties to divulge information to the auditor. If a suitable approach is made the clients agreement will generally be forthcoming. Should the client refuse, this will inevitably lead the auditor to consider whether he should qualify his report, as he may not be able to satisfy himself, by means of other audit procedures, as to the validity and accuracy of the debtor balances. In general, the weaker the internal control the more important it is to obtain external confirmation of debtor balances. The circularising of debtors on a test basis should not be regarded as replacing other normal audit procedures, such as the substantive testing of sales transactions, but the results may influence the scope of such tests.

Annex B Audit Guidance Statement 2 Verification of Debtor Balances - Confirmation by Direct Communication http://www.icpascaa.org.sg/standards/ags Positive and negative confirmation Para 7: When circularization is undertaken, the method of requesting information from the debtor may be either positive or negative. Under the positive method the debtor is requested to confirm the accuracy of the balance shown or state in what respect he is in disagreement. Under the negative method the debtor is requested to reply only if the amount stated is disputed. In either case the debtor is requested to reply direct to the auditor. Both methods may be used in conjunction with the positive form used for large balances and the negative form for small balances.

Annex C A sample blank confirmation letter to address deficiencies discussed earlier.

CSB Pte Ltd Capital Tower #17-00 168 Robinson Road (S)068912
5 April, 2008 Sui Bien Supplies Pte Ltd 2020, Toa Payoh, Singapore 987654 Dear Sir/Mdm, Our financial statements are currently being audited by the auditing firm, Jean & Phil, Certified Public Accountants (Singapore). In connection with this audit, we ask that you provide the balance outstanding as at 31 March 2008. Please detach the slip below and reply with the balance outstanding directly to our auditors. Please note that this is not a request for payment. Please do not send payment to our auditors. Your prompt attention to this request is greatly appreciated. A stamped, self-addressed envelope is enclosed for your reply. Yours Truly,

Chan Yi, Financial Controller

-------------------------------------------------------Tear along the dotted line-----------------------------------------------------

To: Jean & Phil , CPA 133 Fleet Street, Singapore 123456 The balance owed by us, Sui Bien Supplies Pte Ltd, to CSB Pte Ltd as at 31 March, 2008 is SGD $____________.(Please state the amount) Remarks : _______________________________________________________________________________
_______________________________________________________________________________
Date: ________________ Signed : ___________________________ Name : ___________________________ Position: ___________________________