Question 5

a) You are the Audit Senior of Jade & Jade and you are preparing for the final audit of Beige Ltd (Beige), a trading company, for the year ended 31 May 2020. Beiges profit before tax per the draft financial statements for the year ended 31 May 2020 was 50 million and total assets as at that date were 200 million.

Beige sells specialised medical equipment such as CT scans, ventilators, infusion pumps and incubators to hospitals, in both the public and private sectors, across the United Kingdom. Beiges head office and warehouse are based in Leeds and all supplies to customers are made from this location.

The following matters have come up in a recent discussion between your audit team and Beiges finance director:

i. Inventories

The total value of inventory is 30.2 million. Beige uses a continuous or perpetual inventory counting method and the computerised system tracks sales and keeps a running tally of quantities on hand. Any inventory write-offs during the year in relation to inventory loss or other inventory adjustments are authorised by the finance director.

The finance director has assured the audit team that the inventory counting system in use is very accurate.

Included in the year-end inventory, is a batch of faulty incubators with cost of 10 million. A fault has been detected with the calibration of these units and Beige will bear all the cost of fixing the fault before they can be sold.

ii. Trade receivables

Trade receivables are measured at fair value less appropriate allowances for estimated irrecoverable amounts. The allowances are recognised in the income statement when there is objective evidence that the asset is impaired.

Debtor statements are produced at the end of every month and sent to the individual debtors.

Below is an extract from the notes to the draft financial statements.

31 May 2020 31 May 2019

m m

Trade receivables gross 49. 9 54.0

Allowance for doubtful debts (2. 7) (7.0)

Trade receivables net 47.2 47.0

iii. Contingent liabilities

There are ongoing regulatory investigations and litigation relating to prior periods. Beige has also received claims from ten former employees alleging unfair dismissal during the year. Management is of the view that the likely outcome and potential impact on Beige of any such litigation is subject to several significant uncertainties and therefore, the company cannot make an assessment of the likely outcome or quantum of any such litigation as at the date of this disclosure. Beige is of the view that there are substantial factual and legal defences to these claims and the company intends to defend them.

Accordingly, managements assessment is that no provision is required, and disclosure as contingent liabilities at the year-end is appropriate.

Required:

Describe the substantive audit procedures that should be performed in relation to each of the above matters