It is September 15, 2023, and you, an audit manager at KAP Ali&Budi, are in charge of reviewing the audit engagement file of PT MataMata (MM), which has a year-end of July 31, 2023. Today you will be reviewing audit work performed by your colleague Charlie on MMs revenue section. Charlie has been with KAP Ali&Budi for almost two years and this was his first time working on such a large and complex audit section.

Company Background

MM is a privately controlled Indonesian company that uses specialized drone technology to offer aerial imagery services for surveying and monitoring mining sites. The company also sells high-end specialized drones that customers can buy and use themselves. Most of MMs customers are located in Kalimantan and Eastern Indonesia, where many new mines are currently under development.

RevenueSignificant Risks

Per the draft financial statements, total revenue for the year was $4 500 000. During planning, occurrence and cutoff of revenue and valuation of accounts receivable were identified as significant risks.

Completed Audit Work

1. On July 1, 2023, PT TambangA, a mining company operating in southern part of Sulawesi, placed an order for 15 specialized drones equipped with infrared monitoring cameras. Each drone sells for about $75 000. The company was planning to use the drones to monitor its mines at night. MM shipped the drones to Sulawesi on July 14, and they arrived in Sorowako on July 25. The plan was to deliver the drones the next day to TambangAs mining site. However, due to heavy rains, the road to the mining site were flooded and the drones couldnt be delivered until August 4, 2023. MM recognized revenue related to this sale when the drones landed in Sorowako. As part of verifying cutoff of revenue, Charlie wrote an email to MMs sales manager asking him to confirm the date the drones were delivered to PT TambangA. The manager replied that the drones were delivered on August 4. In his reply, the manager also wrote that he is currently away on a three-week vacation in Europe, but that from what he remembers the delivery term in the contract was FOB shipping point.

2. On July 29, MM transferred an encrypted video file, containing surveillance images of potential mining sites, to one of its customers in Maluku. For this work, MM billed the customer $150 000. The customer wasnt able to open or use the file because MM used an encryption key not compatible with the customers computer system. After the customer reported the problem, MM reformatted the file and sent it back on August 2, 2023. As part of verifying the occurrence and cutoff of revenue, Charlie obtained the contract related to this transaction and matched contract details such as price and customer information to the invoice. Charlie also matched the invoice total of $150 000 to a deposit in MMs September bank statement, as the customer had already paid for these services.

3. In March 2023, a company operating mines in Papua ordered 11 drones from MM with an upgraded long-lasting battery. The battery can extend flight times between recharges by up to 50 percent. MM shipped the drones in April 2023, but unfortunately five of the shipped drones were not equipped with the upgraded battery. In June 2023, the mining company sent the drones on a long-distance flight and the five deficient drones ran out of power and crashed in a remote mountainous region of Papua. The customer immediately informed MM about the crash. In July 2023, MM uncovered the shipping mistake through an internal investigation and issued a $95 000 refund to the customer the next month. As part of verifying the occurrence and cutoff of revenue, Charlie obtained MMs August 2023 bank statement and searched for the refunded amount. He then vouched the amount to the credit note and the original contract.

4. In February 2023, MM was hired by the PT TambangB, to conduct drone surveillance of potentiall mining sites. A dispute arose when, having shipped too few drones to PT TambangB, MM was not able to carry out the surveillance to the extent that it promised to PT TambangB. PT TambangB now refuses to pay $300 000 for the work that MM performed. Despite the dispute, the owner of PT TambangB really liked MMs drones and bought five of them for $375 000. MM delivered the drones in June 2023, and get paid in August 2023. As part of verifying the existence and valuation of accounts receivable, Charlie sent a confirmation letter to PT TambangB in early September. After waiting over two weeks for a response, Charlie contacted PT TambangBs representative. The representative told him that the confirmation has been received; however, everyone is busy and the confirmation wont be processed until late November. Charlie couldnt wait that long, so he tested the existence and valuation of accounts receivable through an alternative procedure, looking at payments made by PT TambangB subsequent to year-end. After finding the $375 000 payment on the August 2023 bank statement, Charlie concluded that the entire $675 000 accounts receivable balance was stated correctly at year-end.

REQUIRED

a. Review the audit work performed by Charlie. For each of the four audit issues, discuss if the evidence he obtained is reliable and if his work related to the stated assertion.

b. Where applicable, suggest more reliable evidence that Charlie should obtain and, if his work did not relate to the stated assertion, propose additional audit procedures.