ACCA F8 - Audit and Assurance Revision Kit 2016

Warranty provision
(i)
Written representation
The audit team has already carried out some procedures in testing the calculations and assumptions
and found them to be in accordance with prior years (and presumably in accordance with
expectations). All of the evidence to date is from internal sources, but there is unlikely to be readily
available reliable external sources.
It will be difficult for anyone to predict how many warranty claims there will be in the future and the
value of any future claims, and written representation on this matter will be one of the few sources of
evidence available. It will be a useful piece of evidence as a written confirmation that management
believe the assumptions and the provision are reasonable, and more reliable than verbal
representations, despite being from an internal source.
(ii)
Additional procedures
In order to conclude on the warranty provision the auditor should perform additional procedures
including the following:
Assess the adequacy of the provision having established the level of warranty claims
occurring after the year end.
Compare the amounts provided for warranties in previous years with amounts claimed to see
how accurate management’s provisions have proved in the past
Review minutes of board meetings for evidence that equipment manufactured by Greenfields
might contain defects and result in more claims, necessitating an increase in the provision
(c)
Steps to take following refusal to provide written representations
Management has not provided a requested written representation, therefore ISA 580 Written representations
requires the auditor to discuss the matter with management and ask why they will not provide the
representation relating to the warranty provision.
ISA 580 also requires the auditor to re-evaluate the integrity of management and evaluate the effect this may
have on the reliability of any other representations (such as on the Yellowmix balance) and audit evidence in
general.
The auditor must then take appropriate actions, including determining the impact on the auditor’s opinion in
the auditor’s report.
Impact on the auditor’s report
Given the limited evidence available other than the representation, the auditor will be unable to obtain
sufficient appropriate evidence over the material warranty provision. Therefore a modification of the
auditor’s opinion is required. A qualified opinion will be issued because the misstatement, although material,
will not be pervasive.
The opinion paragraph will explain that, except for the possible effects of the matter explained in the
following paragraph, the financial statements are fairly presented in all material respects (or show a true and
fair view). A basis for qualified opinion paragraph will be included after the opinion paragraph explaining the
opinion has been modified because of management’s refusal to provide the written representation.
116 Strawberry
Text references. Chapters 6, 11, 18 and 19.
Top tips. This question examines analytical procedures and going concern.
Part (a) of the question asks for an explanation of the three stages of an audit when analytical procedures can be
used. This should be relatively straightforward if you have a good understanding of the basics.
Part (b) asks for an explanation of potential indicators of going concern problems based on a scenario. The best
approach to adopt is to work systematically through the information looking for facts in the question that indicate
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