The following scenario relates to questions 1 – 5.
You are the audit manager of Nutcracker & Co and are reviewing the key issues identified in the files of two audit clients.
The first audit client is Height Industries Co (Height), a listed company. Height’s year end was 31 March 20X5 and the draft financial statements show revenue of $28.2m, receivables of $5.6m and profit before tax of $4.8m. The fieldwork stage for this audit has been completed. A customer of Height owed an amount of $350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Height from this customer as they were disputing the quality of certain goods received from Height. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.
The second audit client is Stem Trading Co (Stem). Stem is a new client of Nutcracker & Co, its year end was 31 January 20X5 and the firm was only appointed as auditor in February 20X5, as the previous auditor was suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.
The inventory count at Stem’s warehouse was undertaken on 31 January 20X5 and was overseen by the company’s internal audit department. Neither Nutcracker & Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year end.
The draft financial statements show a profit before tax of $2.4 million, revenue of $10.1 million and inventory of $510,000.
1. Which of the following audit procedures should be performed in order to form a conclusion on whether an amendment is required in Height’s 20X5 financial statements in respect of the disputed balance?
A. Review whether any payments have subsequently been made by this customer since the audit fieldwork was completed