BBC Co. Ltd (BBCL) specialises in manufacturing equipment which can help to reduce toxic emissions in the production of chemicals. The company has grown rapidly over the past eight years and this is partly due to the warranties that the company gives to its customers. It guarantees its products for five years and if problems arise during this period, it undertakes to fix them or provide a replacement.

You are the manager responsible for the audit of BBCL and you are performing the final review stage of the audit and have come across the following issues:

(a) Receivable balance owing from Nhyira Co. Ltd:

BBCL has a material receivable balance owed by its customer, Nhyira Co. Ltd. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Nhyira Co. Ltd for over six months. BBCL would not allow this balance to be circularised. Instead management has assured your team that they will provide a written representation confirming that the balance is recoverable.

(b) Warranty provision:

The warranty provision included within the statement of financial position is material. The audit team has performed testing over the calculations and assumptions which are consistent with prior years. The team has requested a written representation from management confirming that the basis and amount of the provision are reasonable. Management is yet to confirm acceptance of this representation.

Required:

(i) Describe the audit procedures required in respect of accounting estimates. (5 marks)

(ii) For each of the two issues above:

(a) Discuss the appropriateness of written representations as a form of audit evidence.(5 marks) (b) Describe additional procedures the auditor should now perform in order to reach a conclusion on

the balance to be included in the financial statements.