Reference no: EM133179896

Question - It is 1 July 2015. You work in the audit department of JAKSARP & Co. The Becks Group (the Group) is an audit client of your firm and the audit for the financial year ended 31 December 2014 is in the completion stage. The Group, which is not listed, installs and maintains security systems for businesses and residential customers. Materiality for the audit of the Group financial statements has been determined to be GHS400,000. You are reviewing the audit working papers, and have gathered the following information:

Fraud - The Group finance director has informed the audit team that during the year, a fraud was carried out by a manager, John Hulio, in one of the Group's procurement departments. The manager had raised fictitious supplier invoices and paid the invoiced amounts into his personal bank account. When questioned by the Group's finance director, John Hulio confessed that he had stolen GHS40,000 from the Group. The finance director asked the audit team not to perform any procedures in relation to the fraud, as the amount is immaterial. He also stated that the financial statements would not be adjusted in relation to the fraud.

The only audit evidence on file is a written representation from management acknowledging the existence of the fraud, and a list of the fictitious invoices which had been raised by the manager, provided by the finance director. The audit working papers conclude that the fraud is immaterial and no further work is needed.

Development costs - In August 2014, the Group commenced development of a new security system, and incurred expenditure of GHS600,000 up to the financial year end, which has been capitalized as an intangible non-current asset. The only audit evidence obtained in relation to this balance is as follows:

- Agreement of a sample of the costs included in the GHS600,000 capitalized to supporting documentation such as supplier invoices.

- Cash flow projection for the project, which indicates that a positive cash flow will be generated by 20X8. The projection has been arithmetically checked.

- A written representation from management stating that 'management considers that the development of this new product will be successful'.

You are aware that when the Group finance director was asked about the cash flow projection which he had prepared, he was reluctant to answer questions, simply saying that 'the assumptions underlying the projection have been agreed to assumptions contained in the Group's business plan'. He provided a spreadsheet showing the projection but the underlying information could not be accessed as the file was password protected and the Group finance director would not provide the password to the audit team.

Trade receivables - Trade receivables recognized in the Group's current assets includes a balance of GHS500,000 relating to a specific customer, Hamlyn Co. Audit procedures indicate that at 31 December 2014, the balance was more than six months overdue for payment. In relation to this balance, the following procedures have been performed:

- Agreement of the balance to invoices and original customer order.

- Discussion with the Group credit controller who states that 'we are in discussions with Hamlyn Co and we are confident that some or all of the amount due to us will be paid. We have always allowed this customer extended credit terms and they have always paid eventually.'

Hamlyn Co was included in the trade receivables direct confirmation audit procedure, whereby a sample of customers were asked to confirm the outstanding balance, but no reply was received.

Required - In respect of the development costs and trade receivables:

(i) Comment on the sufficiency and appropriateness of the audit evidence obtained, and

(ii) Recommend the actions to be taken by the auditor, including the further evidence which should be obtained.