Flower Co manufactures motor vehicle components and its year end was 30 June 20X8. You are an audit supervisor of Pepper & Co and the final audit is due to commence shortly.
Total assets are $43.2m and profit before tax is $7.2m. The following matters have been brought to your attention:
Flower Co’s trade receivables ledger is comprised of a large number of customers. In previous years, the audit team has undertaken a positive trade receivables circularization to confirm year end balances. However, the customer response rate has historically been low and so alternative audit procedures have been undertaken. A decision has been made that for the current year audit a circularization will not be performed.
The year‐end trade receivables balance is $3.9m (20X7: $2.8m) and the allowance for trade receivables is $410,000 (20X7: $300,000).
The bank and cash figure included in Flower Co’s draft financial statements is comprised of a number of bank account balances: an overdraft of $5.1m which is the company’s main current account and $0.2m relating to several savings accounts. The finance director has informed the audit manager that all accounts have been reconciled as at the year end.
The overdraft of $5.1m has increased significantly since the prior year (20X7: $1.2m). The directors have informed you that the overdraft facility, which the company requires in order to operate on a daily basis, is due for renewal in October 20X8 and that they are confident it will be renewed.
(a) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to Flower Co’s trade receivables.
(b) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to Flower Co’s bank balances.
(c) Describe the audit procedures the auditor should perform in assessing whether or not Flower Co is a going concern.