Question 1 (15 marks)

You are a partner in the firm of Dunning, Ko & Co. and you are responsible for conducting the final independent review of audits completed by the firm. Dunning, Ko & Co. is a full-service medium-sized public accounting firm that specializes in the audits of moderate-sized high-technology companies.

You are currently reviewing the audit working papers and a draft of the audited financial statements of Simply Electric Inc. (Simply Electric) for the year ended December 31, 2019, as well as the draft audit report (an unqualified opinion dated February 19, 2020) that was prepared by the engagement partner.

Dunning, Ko & Co. have been auditors since the company's inception. The 2019 audit fieldwork was performed by a senior auditor (who had not previously worked on the audit of this particular client) and two junior auditors, and the working papers were reviewed by a manager and the engagement partner.

Based on your review of the working papers, the draft financial statements, and the audit report, you have noted the following:

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Part A - Excerpts from Audit Working Papers

Sales and Accounts Receivable

Balances for confirmation of accounts receivable were selected using systematic sampling and the dollar unit sampling methodology. A total of 40 confirmations were prepared and mailed out by the controller of Simply Electric to those accounts selected by the auditors. Of these, 36 were eventually returned directly to the auditors with no differences. The remaining four accounts were verified by vouching the balances reported as due to the sales invoices issued during 2019. No exceptions were found.

The junior auditor responsible for auditing the accounts receivable balances then discussed the provision for doubtful accounts with the controller and concluded that it was adequate, and included a note in the working papers of their discussion. No additional work was performed on accounts receivable or the allowance for doubtful accounts.

The senior auditor recalculated the returns and allowance using the historical rate of returns which was noted in the previous year's audit file.She calculated an appropriate year-end provision for returns and allowances to be in the range of $300,000 to $400,000. The client had booked a returns provision in the amount of $350,000 therefore she determined that no error was required to carry forward to the unadjusted error summary.

Inventory

The audit senior conducted the inventory count procedures.The following is an excerpt of the work performed at the count:

Inventory during the count was well organized and all items in the warehouse were appropriately tagged.Per the warehouse manager, all products with the inventory product quality issue had been set aside in a separate area of the warehouse.Inventory counters were working in pairs to ensure the accuracy of the count.

Inventory Test Counting

Selected a sample of 40 items from the inventory listing and performed a test count on each of these items. The following discrepancies were noted:

Product Description # of boxes # of per boxes auditor per count Product # 5267XYB Electrical Wire (40 cm length, 100 per 30 boxes 34 boxes box) Product # 645XMHN 5 mm screws (1000 screws per box) 10 boxes 9 boxes