Section B

Question 2 (12 marks)

You are an audit manager of a local CPA firm CBD & Co. Recently Madison Limited appointed your firm to audit their financial statements for the year ended 31 December 2019 and you are assigned to be in charge of this engagement. During the audit, you identified the following issues in respect of the receipt cycle:

1. (i) cheques received from trade debtors in the subsequent period were recorded as current period receipts; and

2. (ii) no impairment loss on bad and doubtful debts was provided to certain trade debtors long outstanding balances.

Required:

1. (a) In respect of the receipt cycle, identify the assertion(s) to which the above issues relate and suggest one preventive internal control procedure for each issue.

   (6 marks)

2. (b) You received the following replies from the confirmation letters you sent to the trade debtors of Madison:

1. (i) Our balance of amount due to you at 31 December 2019 was $170,000. We have paid your invoice dated 15 December 2019 of $160,000 on 23 January 2020. The remaining $10,000 is for your invoice dated 24 December 2019. We dont know where your extra $20,000 came from. (In Madisons ledger, the balance of trade receivable at 31 December 2019 was $190,000).

2. (ii) We owe you nothing on 31 December 2019! We ordered $120,000 of goods from you on 15 December 2019 but your sales officer replied that you were out of stock. We finally received the goods on 5 January 2020.

   Briefly discuss the additional audit procedures you would perform in order to obtain sufficient appropriate audit evidence.