5-40 Part I. Lernout & Hauspie (L&H) was the world’s leading provider of speech and language technology products, solutions, andservices to businesses and individuals worldwide. Both Microsoft and...

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5-40 Part I. Lernout & Hauspie (L&H) was the world’s leading provider of speech and language technology products, solutions, and services to businesses and individuals worldwide. Both Microsoft and Intel invested millions in L&H. However, accounting scandals and fraud allegations sent the company’s stock crashing and forced the firm to seek bankruptcy protection in Belgium and the United States. The following selected information pertains to L&H’s sales and accounts receivable: ¢ Consolidated revenue increased 184 percent from the 1997 fiscal year to the 1998 fiscal year. e Revenue in South Korea, which has a reputation as a difficult market for foreign companies to enter, increased from $97,000 in the first quarter of 1999 to approximately $59 million in the first quarter of 2000. ¢ In the second quarter of 2000, sales grew by 104 percent but accounts receivable grew by 128 percent. e Average days outstanding increased from 138 days in 1998 to 160 days for the six-month period ended June 30, 2000. Required: a. Based on the above information, which assertion(s) for sales should the auditor be most concerned with? Why? b. Based on the above information, which assertion(s) for accounts receivable should the auditor be most concerned with? Why? c. What audit evidence should the auditor gather to verify the assertion(s) for sales and accounts receivable? Be specific as to how each type of evidence relates to the assertions you mentioned in parts (a) and (b) of this question. Part II. L&H’s auditor did not confirm accounts receivable from customers in South Korea. However, The Wall Street Journal contacted 18 of L&H’s South Korean customers and learned the following: e Three out of 18 customers listed by L&H stated that they were not L&H customers. e Three others indicated that their purchases from L&H were smaller than those reported by L&H.
Answered Same DayMar 11, 2023

Answer To: 5-40 Part I. Lernout & Hauspie (L&H) was the world’s leading provider of speech and language...

Prince answered on Mar 11 2023
43 Votes
Part 1.
A. Based on the above information, the auditor should be most concerned with assertions related to the accuracy of sales revenue recognition and sales return allowances. This is due to the large increase in r
evenue in South Korea and the high growth rate of sales in general. The South Korean market is known to be difficult for foreign companies to do business in and is likely to have more negotiable terms in contracts. Additionally, the large increase in sales may indicate an overly aggressive approach to revenue recognition. Moreover, the large increase in sales compared to the increase in accounts receivable may indicate that the sales return allowances were insufficiently estimated.
b. The auditor should be most concerned with assertions relating to the existence and completeness of accounts receivable. The rapid growth in accounts receivable suggests that there may be additional transactions that are not recorded in the accounts receivable ledger. Additionally, the increase in average days outstanding from 138 to 160 days in a six-month period could suggest that the company is not properly recording the sales of products or services and the corresponding accounts receivable. It is important for the auditor to ensure that the accounts receivable being recorded are in fact valid and that no receivables have been omitted or overstated.
C. The auditor should gather several types of evidence to verify the assertions for sales and accounts receivable. First, he/she should examine any contractual agreements with customers to ensure that sales are posted in a timely manner and that revenue is being recognized in accordance with applicable laws and regulations. It may also be beneficial to review customer credit limit documents, as well as any customer payment terms and payment records, to ensure that the revenue and accounts receivable amounts being recorded are accurate and complete.
Other evidence the auditor should consider gathering for accounts receivable includes customer aging schedules and invoices, both of which provide an indication of how current each customer’s receivable is. The auditor should also collect documents such...
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