Assignment task 1:
Alsion Private Company Ltd has been operating in the manufacturing sector for over a decade. One of its major products is manufacturing equipment, which can reduce toxic emissions in the production of chemicals. The company recently employed a new marketing manager who introduced series of marketing initiatives. This has resulted in significant growth of the company since the appointment of the marketing manager. One of the initiatives is the warranties that the company gives to its customers. The company guarantees its products for three years, and if problems arise within the period, it undertakes to fix them or provide a replacement for the product.
You are the Senior Manager recently engaged by Integrity Audit Consult responsible for Alsion Private Company Ltd's audit. You are performing the final review as required by ISA 520 Analytical procedures for the audit and have come across the following issues.
Receivable balance due from Obey Company Ltd.
Alsion Private Company Ltd has a material receivable balance due from a customer named Albey Company Ltd. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Albey Company Ltd for over eight months. Alsion Private Company Ltd however would not allow this balance to be included in the list of balances to be circulated. Instead, management has assured your team that they will provide a written representation confirming that the balance is recoverable.
Warranty provision
The warranty provision included in the statement of financial position is material. The audit team has performed testing over the calculations and assumptions, which are consistent with prior years. The team has requested a written representation from management confirming the basis and amount of the provision. Management is yet to confirm acceptance of the need to issue this representation.
Required:
a) Recommend THREE (3) audit procedures to validate the accounting estimates.
b) For each of the two issues above:
i) Evaluate the appropriateness of written representations as a form of audit evidence.
ii) Describe TWO (2) additional procedures the auditor should perform to conclude on the balances to be included in the financial statements.
c) The directors of Alsion Private Company Ltd have decided not to provide the audit firm with the written representation for the warranty provision as they feel it is unnecessary.
Required:
Explain the steps the auditor of Alsion Private Company Ltd should take to assess the impact of management's refusal to provide a written representation on the auditor's report. (5 marks)
Assignment task 2:
You have recently been promoted to Senior Manager of Issues Matters and Associates, a firm of Chartered Accountants. As part of your job description, you are to handle two clients in a given month. Below are some issues you will be faced with during the audit of these clients. The financial year-end for each client is 30 September 2020. You are reviewing the Audit Senior's draft auditor's reports for the two clients, Facilities Co Ltd and Trays Co Ltd.
Trays Co Ltd
The Audit Senior suggests that Trays Co Ltd's audit opinion should not be qualified but should include an emphasis of matter paragraph after the audit opinion to highlight the situation below:
In October 2020, a legal claim was filed against Trays Co Ltd, by a toy retailer. The suit was from a customer who slipped on a greasy step outside one of the retail outlets. The matter has been fully disclosed as a material contingent liability in the notes to the financial statements. Audit working papers also provided sufficient evidence that no provision is necessary as Trays Co Ltd's lawyers have stated in writing that the likelihood of the claim succeeding is remote. The amount of the claim is fixed and is adequately covered by cash resources.
Facilities Co Ltd
Facilities Co Ltd, a listed company, permanently closed several branches in May 2020, with all closure costs finalised and paid in August 2020. The said branches all produced the same items, which contributed 10% of Facilities Co Ltd's total revenue for the year ended 30 September 2020 (2019 - 23%). The closure has been discussed accurately and fully in the Chairman's statement and Directors' Report. However, the closure was not stated in the notes to the financial statements nor separately disclosed on the financial statements. The audit senior has proposed an unmodified audit opinion for Facilities Co Ltd as the matter has been fully addressed in the Chairman's statement and Directors' Report.
Required:
a) Evaluate whether the Audit Senior's draft auditor's report is appropriate, and where you disagree, recommend the amendment necessary to the draft auditor's report of:
i) Trays Co Ltd
ii) Facilities Co Ltd
b) Assuming the auditors of Issues Matters and Associates are contemplating whether to use emphasis of matter paragraph and other matter paragraph in the audit report, explain both options and the situations when each is relevant.