Milton Chambers CIA was retained by Hall Corporation to perform an audit of its financial statements for the year ending December 31. In a preliminary meeting with company officials, Chambers learned that the corporation customarily accepted numerous notes receivable from its customers. At December 31, the client company’s controlled provided Chamber with a list of the individual notes receivable owned at that date. The list showed for each note the date of the note, amount, interest rate, maturity date, and name and address of the maker. After a careful consideration of the internal control relating to notes receivable, Chambers turned his attention to the list of notes receivable provided to him by the controller. Chambers proved the footing of the list and determined that the total agreed with the general ledger control account for notes receivable and also with the amount shown in the balance sheet. Next he selected 20 of the larger amounts on the list of notes receivable for detailed investigation. This investigation consisted of confirming the amount, date, maturity, interest rate, and collateral, if any, by direct communication with the makers of the notes. By selection of the larger amounts, Chambers was able to verify 75 percent of the dollar amount of notes receivable by confirming only 20 percent of the notes. However, he also selected a random sample of another 20 percent of the smaller notes on the list for confirmation with the makers. Satisfactory replies were received to all confirmation requests. The president of Hall Corporation Chambers that the company never required any collateral in support of the notes receivable; the replies to confirmation requests indicated no collateral has been pledged. No notes were past due at the balance sheet date, and the credit manager stated that no losses were anticipated. Chambers verified the credit status of the makers of all the notes he had confirmed by reference to audited financial statements of the makers and Dun & Bradstreet, Inc. credit rating. By independent computation of the interest accrued on the notes receivable at the balance sheet date. Chambers determined that he accrued interest receivable as shown on the balance sheet was correct. Since Chambers found no deficiencies in any part of his audit, he issued an unqualified audit report. Some month lateral, Hall Corporation became insolvent and the president fled the country. Chambers was sued by creditors of the company, who charged that his audit was inadequate and failed to meet minimum professional standards. You are to comment on the audit program followed by Chambers with respect to notes receivable only.
