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(b) Materiality The materiality level has been set at Sh 1.5 million. While reviewing the audit working papers for the year ended 30 June 2002, you nd the following notes prepared by the senior in charge of the audit. 3.774 5,028 3, Provision for major maintenance 7954 4. Provision for legal costs 480 - 5, Provision for losses on insurance claims - 1,050 6. Provision for credit notes 7. Provision for management and provisions 1,800 2,245_ Total sundry accruals and provisions 16,558 27,253 Notes 1. Sundry accruals For a rll list of accruals sec working paper H2. 1. Supporting documentation has been seen for all accrued amounts over Sh 60,000 totaling Sh.2, 565.000 (68%). All accruals are for normal expenses of the company and appears to be reasonable- 2. Provision for leave pay This amount agrees with the total leave pay due as reected on the printout from the salaries system. We have reviewed the controls in the salaries System, including the computerized leave records and have tested the controls through compliance testing. No weaknesses or exceptions have been found. The reason for the lower Orovision is that the company has changed its leave policy. From 30 April 2002, only management may carry forward leave due to them from one year to the next. I have discussed and conrmed the new policy with Mr. Chege the nancial director. 3. Provision for major maintenance The only movement on this account during the year has been maintenance expenses of Sh 4,046,000 debited against the account. 1 have seen supporting documentation for expenses totaling Sh 850,000 being 21% of Sh 4,046,000. You are the audit manager on the audit of Super Furniture Lid a company which manufactures office and household furniture. The financial year-end of the company is 30 June 2002 and you took charge of the audit assignment on 20 august 2002 after the resignation of the previous audit manager. The following are extracts from the audit-planning memorandum. (a) Shareholdings Currently all shares are held by the directors. A takeover offer has been received from Dominant Furniture Ltd, a listed company to buy 51 % of the equity shares in Super Furniture Ltd. Negotiations are still under way. (b) Materiality The materiality level has been set at Sh 1.5 million. While reviewing the audit working papers for the year ended 30 June 2002, you find the following notes prepared by the senior in charge of the audit.You are required to: (a) Define inherent risk and indicate in respect of the line item "sundry accruals and provisions" what effect the proposed turnover has on: 1. Your assessment of the inherent risk 2. Your audit approach (b) Draft review notes to the senior in charge of the audit on any five of the seven items making up the balance of sundry accruals and provisions. In each case you should indicate 1 . Whether you are satisfied with the basis of calculation and the accounting principles applied. ii. What additional audit work, if any, needs to be performed?4. Provision for legal costs This amount has not been incurred at the year-end and concerns the estimated legal costs for the company's defense of a claim for damages against it by an ex-employee. The employee was retrenched in January 2002. As the court case started in September 2002, this is an over provision (carried forward to the list of immaterial errors. 5. Provision for credit notes This provision is maintained at Sh 750,000 and is for possible credit notes after the year-end relating to invoices issued before the year-end. As the average monthly credit notes amount to approximately Sh 720,000 the provision is considered to be sufficient. 6. Provision for management bonuses All managers are entitled to a bonus based on criteria which are determined a year in advance at their annual performance review interview. Mr. chege refused to give me a list of bonus amounts or the letters setting out the bonus criteria, as the amounts have not been finalized and are still confidential. The provision appears to be reasonable when expressed a as percentage of turnover 0.45% (2002) compared to 0.47% (2001)
