Kyle Kids, Inc.

You are auditing Kyle Kids, Inc. (Kyle) for the year ended December 31, 2019. Kyle manufactures plastic
building blocks for children and sells to retailers across the Philippines. It has been operating since the
1980s.

Kyle’s facilities include a head office building, a large manufacturing factory, and four large warehouses.
Once production of the toys is finished, the toys are warehoused in one of the warehouses until they are
delivered to customers. Kyle has no internal audit department.

Each retailer-customer is designated a unique account number, which is used to enter sales order received
in writing from the customers. An order clerk enters the orders. The system then automatically checks that
the goods are available and that the order will not be over the customer’s credit limit. However, for first
time customers, the sales manager processes the credit application, which is checked through a credit
agency. The credit controller then enters the credit limit of such first-time customers into the system. Kyle
has a list of prices, which is updated every six (6) months. Large customers may avail of a discount. This
discount scheme shall be confirmed by the sales director and shall be set up in the customer master file.

After the order is entered, Kyle then confirms acceptance of the goods ordered via mail/e-mail automatically
sent to the customer with an information on the most likely delivery date. Kyle then sorts the order
according to the address of the customer and the warehouse closest to the customer receives the order. A
delivery list and sequentially pre-numbered goods delivery notes are generated. One warehouse employee
packs the goods from the delivery list and, before the goods are delivered, a second employee double checks
the delivery list to the sequentially pre-numbered goods delivery note, which shall accompany the goods to
be delivered.

Once delivered, a copy of the goods delivery note is sent to the accounts receivable department in the head
office and a sequentially pre-numbered sales invoice is raised and checked to the goods delivery note. A
computer sequence check is done regularly to check for missing sales invoice numbers.

In 2019, Kyle uncovered a material fraud. The fraud involved the scheme of cash/check receipts from
customers being channeled into personal accounts of employees. To cover up the fraudulent scheme,
perpetrators recorded receipts from subsequent unrelated customers against the earlier outstanding
receivable balances.

The fraud was made possible because of the collusion between related employees. One employee was in
charge of the cash receipts and prepared the bank reconciliation weekly and the other employee recorded
the receipts in the sales ledger. Monthly customer statements of account were supposed to be sent out by a
sales ledger clerk, however, this was not done. There was also no review of the bank reconciliations, which
showed a small unreconciled amount each. The fraud was only uncovered when both perpetrators took a
vacation leaves at the same time and it was discovered that cash/checks receipts from customers were being
applied to older receivables to hide the earlier sums embezzled.
Requirements:

As the auditor, what substantive procedures would you perform to confirm Kyle’s year-end receivables?

The following substantive procedures should be performed to confirm Kyle’s year-end receivables:
• Positive trade receivables circularization of Kyle's year end balances should be performed. In addition,
send a reminder letter to follow up for those who did not manage to reply, with Kyle's permission.
• Recheck the after date cash receipts and follow through to pre-year-end receivable balances.
• Compute the average receivable days and use this as reference to compare this to prior year, investigate
any significant differences.
• Review the reconciliation of sales ledger control account to the sales ledger list of balances.
• Choose a sample of good delivery notes before and just after the year end and follow through to the
sales invoice to ensure they are recorded in the correct accounting period.
• Investigate the aged receivables report to identify any slow moving balances, explain these with the
credit control manager to decide whether an allowance or write down is appropriate.
• For any slow moving/aged balances review customer correspondence to assess whether there are any
invoices in dispute.
• To assess whether there are any material disputed receivables, board minutes of Kyle should be
rechecked.
• Recheck a sample of post year-end credit notes to identify any that relate to pre-year-end transactions
to verify that they have not been included in receivables.
• Review the sales ledger for any credit balances and discuss with management whether these should be
reclassified as payables.
• Choose a sample of year-end receivable balances and confirm back to valid supporting documentation
of good delivery notes and sales order to ensure if it really occurred.