ACCA F8 - Audit and Assurance Revision Kit 2016

Marks
– Junior asked to challenge FD – inappropriate delegation
– Audit running out of time – poor planning?
– Changed sample size – inappropriate response to time pressure
– Changed item selected in sample – inappropriate response to time pressure
Maximum 14
Total 20
(a)
Trade receivable
Materiality for whole receivable
Materiality on revenue: $30,000
$12.5m = 2.4%
Materiality on net profit: $300,000
$400,000 = 75%
Materiality on total assets: $300,000
$78m = <1%
The receivable is not material to the statement of financial position. It would, however, be material to the
statement of profit or loss if an impairment loss were recognised in relation to it.
Accounting treatment
IFRS 9 Financial Instruments requires receivables to be recognised at fair value. The fair value of the Cherry
Co receivable is the 25% that the administrators suggest it may be able to pay, ie $75,000. $225,000 should
therefore be recognised as an impairment loss in the statement of profit or loss.
Calculating materiality for the impairment loss:
Materiality on revenue: $225,000
$12.5m = 1.8%
Materiality on net profit: $225,000
$400,000 = 56%
This is clearly material to profit for the year.
Inventory
As Cherry Co is a customer, it is possible that Sultana Co is holding inventory or work in progress that was
ordered by Cherry Co. Raisin & Co needs to ascertain whether this is the case, and if so whether the
inventory can in fact be sold. If it cannot be, then it may be impaired and should be written down,
recognising the loss in profit for the year.
Audit opinion
If Sultana Co does not amend its financial statements, the audit opinion will be modified due to a material
misstatement. This would probably be an 'except for' qualification as the misstatement is material but not
pervasive.
Audit evidence
External documentation confirming the insolvency of Cherry Co and the possible repayment of only
25% of the receivable
Confirmation from the administrator of the 25% to be paid, including an indication of when this is
likely to happen
Agreement of the amount owed from the receivables listing to the ledger
Answers 83