Signal plc

This company is a mobile phone retailer and has revenue during the year of RM80 million, with a pre tax profit of RM15 million. The company sells mobile contracts to customers with a cash back deal. The company estimates that only 10% of its customers claim the cash back. If the customer fails to claim the cash within a certain time period, they forfeit their right to the cash under the terms of the deal.

During the audit you found out that the company estimated its revenues based on only 10% of customers claiming the cash back. However, during January and February 2014 RM3 million of cash back claims were made relating to sales made in the year ended 31 December 2019. Taking these claims into account 15% of customers had actually claimed the cash back on their contract not the 10% predicted by Signal. The company insists that, over time, its original estimate of 10% will prove to be accurate and have refused to adjust the revenue recorded in the year ended 31 December 2019 for these cash back claims.

Required:

1. For the situation described above, consider the type of audit report you would issue and justify the reasons for your decision (including consideration of materiality and accounting treatment).