Question
Healthcare Bhd is a listed pharmaceutical company. Its principal activities are producing medical and beauty based products. Below is an extract from the income statement
Healthcare Bhd is a listed pharmaceutical company. Its principal activities are producing medical and beauty based products. Below is an extract from the income statement and the statement of financial position for the last 2 financial years of the company.
31 December 2019 (RM '000)
31 December 2020 (RM'000)
Income Statement (extract)
Revenue
37,410
31,820
Cost of Sales
(17,600)
(21,265)
Gross Profit
19,810
10,555
Operating expenses
Administration
(6,175)
(6,600)
Selling and distribution
(4,905)
(3,445)
Interest payable
(505)
(525)
Investment Income
725
-
Profit/(loss) before tax
8,950
(15)
Statement of financial position (extract)
Cash and bank
1,265
(4,750)
Account receivables
11,700
10,000
Additional information:
i.Sales are made to companies, with income being in the form of cash and credits. Credit sales are given to trusted customers with a term of n/60. The current year accounts receivable includes a long overdue balance of RM1,700 which is outstanding more than a year. However, the company does not record any allowance for doubtful accounts.
ii.All items are delivered to the customers using Healthcare Bhd's own delivery vans. The directors of Healthcare Bhd indicate that the company had a difficult year, but are pleased to present some acceptable results to the shareholders.
Required:
(a)As part of your risk assessment procedures in relation to the revenue cycle, identify and explain for the unusual changes in the income statement. Describe the audit procedures to address those risks.
(12 marks)
(b)Confirmation of the year end bank and account receivables balances are important audit procedures. Explain the reason and the audit objectives pertaining to the procedures.
(8 marks)
(c)Explain and discuss the typical risks that are associated with account receivables and revenue.
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