(b) Receivables balance owing from Yellowmix Co
(i) The written representation proposed by management is intended to verify valuation, existence and rights and obligations
of a material receivables balance. As management has refused to allow the auditor to circularise the balance and there
has been little activity on the account for the past six months then there is very little evidence that has been obtained
by the auditor.
This representation would constitute entity generated evidence and this is less reliable than auditor generated evidence
or evidence from an external source. If related control systems operate effectively then this evidence becomes more
reliable. In addition if the representation is written as opposed to oral then this will increase the reliability as an evidence
source.
Overall this representation is a weak form of evidence, as there were more reliable evidence options available, such as
the circularisation but this was not undertaken.
(ii) In order to reach a conclusion on the balance the following procedures should be performed:
– Discuss with management the reasons as to why a circularisation request was refused.
– Review the post year-end period to identify whether any cash has now been received from Yellowmix Co.
– Review correspondence with Yellowmix Co to assess reasons for the continued non-payment.
– Review board minutes and legal correspondence to assess whether any legal action is being taken to recover the
amounts due.
– Discuss with management whether a provision or write down is now required.
– Consider impact on audit opinion if balance is considered to be materially misstated.
Warranty provision
(i) In this case the auditor has performed some testing of the provision in order to obtain auditor generated evidence. The
team has tested the calculations and assumptions. None of this is evidence from an external source.
The very nature of this provision means that it is difficult for the auditor to obtain a significant amount of reliable evidence
as to the level of future warranty claims. Hence the written representation, whilst being an entity generated source of
evidence, would still be useful as there are few other alternatives.
(ii) In order to reach a conclusion on the balance the following procedures should be performed:
– Review the post year-end period to compare the level of claims actually made against the amounts provided.
– Review the level of prior year provisions with the amounts claimed to assess the reasonableness of management’s
forecasting.
– Review board minutes to assess whether any changes are required to the level of the provision as a result of an
increased or decreased level of claims by customers. |
