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Evaluating substantive testing result The following items are documented in the audit working papers: A sales transaction included in the year ended December 31, 2023,
Evaluating substantive testing result
The following items are documented in the audit working papers:
- A sales transaction included in the year ended December 31, 2023, but evidence from the cut-off procedure suggests that the sale should be dated January 2, 2024 ($1,250,000).
- Warranty expenses in the trial balance for the year to December 31, 2023, total $150,000; the liability for warranty claims as at December 31, 2022, was $100,000. Evaluation of correspondence suggests that an additional $300,000 in warranty claims could result from ongoing disputes with customers. No provision for these claims has been made. Management has made a warranty provision for 2023 of $120,000.
- Severance expenses related to reorganization of head office administration were incorrectly charged to rental expenses ($578,920).
- Management has not recorded an impairment for assets. A drought-induced recession has hurt property values in regional cities where seven branch offices are located. (Head office and two branch offices are located in the capital city.) Total land and buildings in the trial balance is $5.5 million.
Required
a. Evaluate each item above and explain whether it is an error or a judgemental misstatement. What action do you recommend for each?
b. Which accounts would be affected, and how, if an adjustment is made for each item?
c. Which of the above items involve estimates? What procedures should be performed? Consider management bias in your response.
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