ACCA F8 - Audit and Assurance Revision Kit 2016

Obtain written representations from management that they believe the significant assumptions used
are reasonable.
Top tips. Five well explained procedures were needed. Some more valid ones are:
Perform a recalculation of the estimate.
Compare the estimate with expectations and the prior year’s estimate and investigate variances.
For accounting estimates that give rise to significant risks, evaluate the adequacy of disclosure of
their estimation uncertainty.
Obtain sufficient appropriate audit evidence about whether disclosures are correct.
Evaluate whether the accounting estimates are either reasonable or misstated.
(b)
Yellowmix receivable balance
(i)
Written representation
Management have offered a written representation over the recoverability of the balance but have not
allowed circularisation of the receivable. This suggests they believe the written representation is an
adequate substitute for the evidence gained from a circularisation.
However, this is not the case. The circularisation would provide evidence is on existence, valuation
and rights/obligations on the receivable balance. The written representation proposed by
management is focused on the recoverability and gives only weak evidence over the relevant
assertions. Despite being in writing and more reliable than a verbal representation, the internally
generated representation is not as good as evidence from an external source (such as any potential
response from Yellowmix to the circularisation).
With the other evidence available being limited due to the lack of payment activity over the last six
months, without further more compelling evidence, the representation alone would appear
insufficient to conclude that receivables are free from material misstatement.
(ii)
Additional procedures
In order to conclude on the receivables balance the auditor should perform additional procedures
including the following:
Enquire of management why they did not permit the circularisation
Review any correspondence with Yellomix to see if there is any reason for the delay in
payment or for any disputes of invoices outstanding at the year end
Review post year end cash receipts to see if any related to Yellowmix and give evidence of
existence and recoverability of the year end balance.
Top tips. Only three procedures were needed for each issue. However in respect of the receivables balance,
here are some others you may have come up with:
Review board minutes and legal correspondence for evidence of legal action in respect of recovering
the debt
Discuss with management whether an allowance for irrecoverable receivables is needed.
It the balance is considered materially misstated, consider the effect on the auditor’s opinion in the
auditor’s report.
Answers 171