CASE 2.3 Happiness Express, Inc.

1. Identify the primary audit objectives that auditors hope to accomplish by (a) confirming a clients
year-end accounts receivable (b) performing year-end sales cut-off tests.
The primary audit objectives that the auditors hope to accomplish by confirming a clients year-end
accounts receivable are existence, completeness, and valuation. By using confirmations, the auditors are
hoping that the third party would confirm or deny the stated amount, or add additional comments with
the confirmation. By examining the exceptions (which includes the non-repliers), the auditors are
accomplishing the existence (client exists), completeness (balances that should be recorded are
recorded), and valuation assertion (amount is appropriate). Because the auditors will always have nonrepliers, accounts receivable confirmations are likely to be more effective for the existence assertion
than for the completeness and valuation assertions (AU330.12). With the sales cutoff, the auditors are
primary hoping to achieve an appropriately low level of audit risk related to the completeness and
existence assertions for accounts receivable (AU330.09). The auditor may want to achieve the valuation
assertion as well for high audit risk clients by examining all significant transactions for a period
surrounding the cutoff date (AU 9350 1.02b).
2. Identify and briefly describe any mistakes or errors in judgment that Coopers & Lybrand may have
made in its efforts to confirm the Wow Wee receivable at the end of fiscal 1995. In your opinion, did
these apparent mistakes or errors in judgment involve negligence on the part of the given auditors?
Would you characterize the mistakes or errors as reckless or fraudulent? In each case, justify your
answer.
Auditors failed to double-check the fax confirmation. The auditors relied only on the faxed transmission
and nothing else. Fax confirmations involve risks because of the difficulty of...
Case 2.3
Huayu Huang
Advanced Auditing Class
1. The primary audit objective that auditors hope to accomplish by confirming a clients year-end
accounts receivable is to test the existence and valuation of the accounts receivable. By performing
the confirmation with the clients customer, auditors try to verify that the accounts receivable shown on
the balance sheet exists and is indeed the amount owed to the client. It also tests the valuation
assertion that the accounts receivable is recorded at appropriate amounts and any valuation
adjustments are properly shown on the financial statements.
The primary audit objective that auditors hope to accomplish by performing year-end sales cutoff tests
is to test the cutoff and completeness assertions. To test the cutoff assertion, auditors have to
ensure that significant transactions occurring near year-end are recorded in the financial statements in
the proper period. The completeness assertion addresses that the ending balance shown for accounts
receivable on the balance sheet includes all such assets as of the balance sheet date.

2. When the auditors are provided with an incorrect address for Wow Wees receivable, the auditors
could not contact the clients customer. They solely rely on the former CFOs offer to contact the
appropriate individual at Wow Wee to ensure that the confirmation was returned to Coopers. However,
this is a big mistake because it gives the CFO an opportunity to forge a confirmation. This mistake
involves negligence on the auditors because they should be aware of this red flag. It is highly possible for
the CFO to forge a confirmation about the accounts receivable. Since this account receivable is
significantly large on the balance sheet, the CFO might have the intent to mislead the auditors about the
correct amount of such large transaction. In this case, the mistake is characterized as negligence
because the auditors fail to perform the confirmation procedure with...
Irene Gonzales
CASE ANALYSIS
Case 11
1.) Yes, they both violated the code of ethics. For Zabios case, she should not offer her services base
on contingency fee. It is good that Zabios consultancy firm can provide a payroll system which is
much cheaper compared to the existing payroll system of Wee Corporation, but the payment of the
services should not be based on how much Wee Corporations saving if they choose to use new
system, rather the payment should be based on service performed, time required, experience, ability,
reputation, responsibility assumed, and benefits that accrue to the clients.For Zorro, he violated the
Code of Ethics also for it is stated that he is the external auditor of Wee Corporation, he should not take
part any internal transaction or duties for it may impaired his Independence in making his statement as
to the fairness of the Financial Statement of the Corporation.
2.) Yes, Zorro violated the Code of Ethics for Professional Accountant, because payment on services
offered should not be based on contingent fees. Further, being an accountant/external auditor, he has
the responsibility to work with integrity, objectivity and independence. By doing so, he might impair his
independence.
3.) Even though Wee Corporation is a nonpublic or public SEC registrant, still it is not allowed or ethical
that the service fee would be based on contingent on the findings or results of the service.
CASE 12
1.) First, I would examine disbursement book of Rojo Company if the amount reflected on the said
account was the same written on the invoice amount. If it confirmed that the amount paid is the same
in the invoice, then I would inform the Accounting Manager about the discrepancy. I would suggest that
the Rojo Company must pay the remaining liability/obligation, not only because it is material as to
amount involved, but also we are trying to develop trust and confidence among suppliers.
Acknowledging the obligation and..
Case 2.3: Happiness Express, Inc.
1. The primary audit objectives used by auditors to accomplish by confirming a clients year-end
accounts receivable is stated in SAS No. 67, the Confirmation Process. The assertions used by this
standard include existence or occurrence, completeness, and valuation. The existence assertion is to

make sure that the client and accounts exist, the completeness is to make sure that all of the balances
are recorded, and the valuation is to make sure that the balances are recorded at the correct
amount. It is important that the auditor obtains a confirmation from a third party for the information in
accounts receivables. After communicating and obtaining the information, the auditor is to evaluate
the information (SAS No. 67, AU Section 330.11).
The audit objectives auditors use to perform year-end sales cutoff tests are to determine if the
information they obtained by the confirmation reduces the audit risk level. This has a heavy emphasis
on the materiality of the account being assessed, and the lower the audit risk the better. The sales
cutoff tests are usually performed based on the existence and completeness assertions regarding the
accounts receivable balance (SAS No. 67, AU Section 330.09).
2. Coopers & Lybrand did make a couple of mistakes in their audit at the fiscal year ended 1995. First,
they looked over the receivable from Wow Wee and also from West Coast Liquidators, which was not
chosen when Coopers & Lybrand did its confirmation process. Also, when Goldberg faxed a forged copy
of confirmation to Coopers & Lybrand, they accepted it without taking the necessary follow-up
procedures. Lastly, in the sales cutoff test, they did not notice the bogus sales to West Coast
Liquidators during the final month of 1995, or the bogus sales to Wow Wee on the last day of
1995. The mistakes made by Coopers & Lybrand definitely involved negligence, and are best
categorized as reckless. However, unless they were..
Happiness Express Inc.
1.
a) The primary audit objectives of confirming a clients year-end accounts receivable include occurrence
and accuracy of realizable value. Auditors would like to make sure that the transaction generating the
accounts receivable actually occurs, and that the receivables are recorded at accurate value for the
current reporting period. Usually they will send accounts receivable confirmations to clients customers
directly.
b) The primary audit objectives of performing year-end sales cutoff tests include accuracy and timing,
since the purpose of year-end sales cutoff tests is to check whether revenues and/or receivables were
recorded in the proper period or not. These tests usually involve a review of a selected sample of sales
transactions occurring in the last few days of a fiscal year and the first few days of the following year.
2. Auditors of Coopers & Lybrand have made several mistakes in judgment when they tried to confirm
the Wow Wee receivable at the end of fiscal year 1995. These mistakes include: Auditors informed
Goldberg that Wow Wee was chosen for confirmation, giving him the opportunity to provide an
incorrect address. When auditors didn't receive the confirmation letter back from Wow Wee, they
discussed with Goldberg and allowed him to contact Wow Wee in order to ensure the confirmation
process. It gave Goldberg the opportunity to make fake documents. After the auditors received the
faxed confirmation response, they accepted it directly without further verifying the source and content
of the response. They didn't perform any follow-up procedures.
I would say most of these errors in judgment involve negligence. Fraud is harder to prove than

negligence because fraud requires a scienter or an intent to deceive. In fact, it is difficult to prove that
Coopers & Lybrand had a motive to issue a false audit opinion on Happiness Expresss financial
statements. However, I would rather characterize the mistakes as...
Q1:
The primary objectives that auditors hope to accomplish by confirming a client's year-end accounts
receivable is to check certain management assertions such as existence, rights and obligations, and
valuation. Confirmations from clients and outside parties related to a transaction. Generally, the auditor
sends to the client's customer a confirmation stating the amount owed. The customers are requested to
return a statement to the auditor indicating whether they agree with the amount, or providing
information about any exceptions. Confirmation from the debtor of the client is regular procedure to
support existence assertion. The client's customer`s ability to pay off the debt is valuation assertion.
The primary objective for performing year-end sales cutoff tests is to review year-end purchases, sales,
and investment revenue made to ensure that transactions were recorded in the proper accounting
period. By performing year-end cutoff test, the auditor's tries to test completeness or occurrence
assertion; depending on the direction of testing. The auditor should look very carefully at the year-end
transaction especially if it is substantial and complex. The auditor should select credit (debit)
memoranda for periods before and after the cutoff date, examine the related records of returns and
claims from customers to determine that the credit (debit) memoranda are recorded in the proper
period.
Q2:
Coopers & Lybrand did some mistakes in its effort to confirm the Wow Wee receivable at the end of
fiscal year 1995. The auditors ignored the suspicious nature of the large receivable from Wow Wee and
West Coast Liquidators that resulted from credit sales recorded by Happiness Express in late fiscal 1995.
Happiness Express booked fictitious sales on the final day of fiscal 1995 which Coopers & Lybrand did
not notice or tested during their audit. There was another mistake that auditors failed to notice that
Wow Wee was a manufacturer of toy for Happiness Express..