Substantive Tests - 20 Marks

a) When a client delays expenses of the current financial year to the next financial year, explain the key assertion at risk. Suggest ONE substantive procedure that can be used to detect unrecorded liabilities.(4 marks)

b) The following items are documented in the audit working papers:

- For the year ended 30 June 2017, the client wrote down old inventory to Net Realisable Value by $70 000. However, corroborating evidence and a physical inventory inspection suggests that the amount to be written down should be around $150 000.

- Four sales invoices with a total value of $20 500 dated 1 July 2017 were processed with 30 June 2017 sales.

For each item above, identify whether it is an error or a judgemental misstatement. What action do you recommend for each? Suggest adjusting entries if any.(4 marks)

c) ComputerWorld Ltd manufactures computers and you are its auditor for the year-ended 30 June 2020. To attract more customers, in December 2019 the client changed its payment terms from 30 days to 60 days for any new sales orders. Management believed that the new policy helped credit sales increase 20%. Management made an estimate of the provision for bad debts of $2 000 000 for 30 June 2020, up from $1 800 000 for the previous year. Provision for bad debts is calculated based on 1% of credit sales.

i) Identify and explain TWO key assertions at risk.(4 marks)

ii) For each assertion, describe ONE substantive test of detail that you would undertake.(4 marks)

iii) Discuss any special risks or concerns in auditing provisions for bad debts at ComputerWorld.(4 marks)