AUDIT EVIDENCE PRACTICE QUESTIONS

QUESTION 2: SUBSTANTIVE PROCEDURES REVISION SERIES TRIGGERFISH CO — RECEIVABLES Question Spadefish & Co This scenario relates to four requirements. It is 1 July 20X5 and you are an audit manager of Spadefish & Co and you are currently responsible for the audits of two existing clients: Triggerfish Co manufactures hair products and its year ended on 31 May 20X5. You are finalising the audit programmes for the forthcoming year-end audit. Marlin Co is a distributor of electronic goods and its year ended on 30 April 20X5. The audit is almost complete and the auditor´s report is due to be signed shortly. The following matters have been brought to your attention for each company. Triggerfish Co – Receivables Triggerfish Co´s draft year-end trade receivables are $3.85m (20X4: $2.45m) and revenue for the year is slightly increased on 20X4. Triggerfish Co has a large number of customers with balances ranging from $5,000 to $45,000. Positive confirmation requests have been sent based on the yearend balances. The majority of responses from customers agreed to the balances as per Triggerfish Co’s list of individual customer balances; however, the following exceptions were noted: Balance per Triggerfish Response from customer Albacore Co $36,558 Nil response Flounder Co $24,115 $18,265 Menhaden Co -$5,360 (Credit) $3,450 Due to the increase in receivables, Triggerfish Co has recently recruited an additional credit controller to chase outstanding receivables. As a result of the additional focus on chasing outstanding receivables the finance director thinks it is not necessary to continue to maintain a significant allowance for receivables and has reduced the closing allowance from $125,000 to $5,000. Marlin Co – Going concern During the year under audit Marlin Co has consistently paid a number of its suppliers significantly later than usual and only after several reminders. As a result some of its suppliers have withdrawn credit terms meaning the company must pay cash on delivery. The company has also just received notification that its main supplier who provides the company with over 60% of its specialist electrical equipment has ceased to trade. The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month, and they are confident it will be renewed. The directors have decided that in order to conserve cash, no final dividend will be paid in 20X5. Requirements: (a) Describe the procedures the auditor should perform to resolve the exceptions noted for each customer’s response to the positive confirmation request. (8 marks) (b) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to the allowance for receivables in the current year. (4 marks) (c) Identify and explain THREE potential indicators that Marlin Co is NOT a going concern. (3 marks) (d) Describe the audit procedures the auditor should perform in assessing whether or not Marlin Co is a going concern. (5 marks) (20 marks)