Question

The following items are documented in the audit working papers.

1) Sales transaction included in the year ended June 2017 but evidence from the cut-off procedure suggests that the sale should be dated 1 July 2017 ($550 000).

2) Warranty expenses in the trial balance for the year to June 2017 total $150 000; the provision for warranty claims as at 30 June 2016 was $100 000. Evaluation of correspondence suggests that an additional $200 000 in warranty claims could result from ongoing disputes with customers. No provision for these claims has been made. Management has made a warranty provision for 2017 of $120 000.

3) Redundancy expenses related to reorganisation of head office administration incorrectly charged to rental expenses ($927 440).

4) No expense for impairment of assets has been made by management. A drought-induced recession has adversely affected property values in regional cities where seven branch offices are located (head office and two branch offices are located in the capital city). Total land and buildings in the trial balance is $20 000 000 and management estimate that the value of these assets is impaired by 10 per cent.

1) Evaluate each item above and explain whether it is an error or a judgemental misstatement. What action do you recommend for each?

2) Which accounts would be affected, and how, if an adjustment is made for each item?

Answer 1

Answer 1:

It can be a mistake that the sale activity was involved in the statements of the year June 2017 alternatively of the year 2017. The auditor has enough confirmation that the sale transaction relates to the year 2017. This evidence is undeniable evidence and enough to prove the authenticity of the sale transaction. Consequently, it can be inferred as an error by the administration to show the sale transaction in the year June 2017 rather than the year 2017.

The affected accounts will be:- Sales Account, Debetors Account, Cash/Bank Account, Inventory Account.

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