While reviewing the accounts receivables section of Total Computer, Inc., Tim Jacobs (Audit Manager) noted that the working papers stated that the balances confirmed on Examples 1-4 were “confirmed without exception,” Example 5 had a discrepancy, and alternative procedures were performed on the “no reply” confirmation (Example 6). Tim asked Sarah (Audit Staff) to explain the discrepancy in Example 5. Sarah explained the discrepancy as follows: Betty Bingham (Controller) mentioned that although the typical terms do not allow a customer to return product, except for warranty purposes, this customer had returned a large number of first quality items during the first week of October. This resulted in a proposed audit adjustment in our summary of misstatements as of 9/30/XX. The sixth confirmation, mailed to Dot.Bomb, Inc. (Total Computer, Inc.’s largest customer), was not returned. As a result, alternative procedures were performed, which included examining subsequent cash receipts and the contract. The cash receipts collected as of November 15 (latest available date) totaled exactly half of the amount recorded in the accounts receivable balance as of September 30, 20XX. The working papers stated:
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Case 04-1: Total Computer, Inc.
Based on our review of cash receipts through November 15, the customer has paid half of the balance owed as of September 30. Per discussion with the