Featherbed Surf & Leisure Holidays Ltd. (Featherbed) is a resort company based on Vancouver Island. Its operations include boating, surfing, diving, and other leisure activities; a backpackers' hostel; a family hotel; and a five-star resort. Justin and Sarah Morris own the majority of the shares in the Morris Group, which controls Featherbed. Justin is the chairman of the board of directors of both Featherbed and the Morris Group, and Sarah is a director of both companies as well as the CFO of Featherbed.
While performing the featherbed audit you discover that the Wave Travel Agency, which specializes in group travel to Vancouver Island, has an account with Featherbed. The review of the aging of the accounts receivable balance shows that Wave Travel Agency's balance is large and material and is now more than 60 days overdue. However, no allowance has been made for the outstanding debt. You consult Featherbeds accounting staff, Julie and Kristen, about the account and they mention that there are rumours that the Wave Travel Agency is suffering financial difficulties.
You are aware that CAS 230 has specific requirements about documenting audit work. In particular:
In documenting the nature, timing and extent of audit procedures performed, the auditor shall record:
(a) The identifying characteristics of the specific items or matters tested;
(b) Who performed the audit work and the date such work was completed
(c) Who reviewed the audit work performed and the date and extent of such review. In addition, paragraph 10 states:
The auditor shall document discussions of significant matters with management, those charged with governance, and others, including the nature of the significant matters discussed and when and with whom the discussions took place.
Required
Explain how you would apply the mandatory requirements of the above paragraphs of CAS 230 in relation to the potential bad debt.