Reference no: EM132523411
Question - You are the audit manager at Black & Blue, a medium-sized audit firm undertaking the audit for the year ended 30 June 2013 of High Tech Ltd, an electronic component manufacturer located in Sydney. During the planning stage of the audit you discovered that one of High Tech Ltd's major suppliers went bankrupt one month ago, causing major product shortages. To overcome the problem, Peter James, the husband of the finance director, Natalie James, provided electronic components to High Tech Ltd through his private company. There is no formal agreement in place with Peter James, however, the goods are being provided at competitive prices. You are concerned about the electronic components that Peter James' company is supplying, because his products are new to the market and you have heard some of High Tech Ltd's staff complaining that they are of poor quality.
The board has informed you that although sales have been strong this year, High Tech Ltd has suffered significant cash flow problems because a major debtor, Creative Ltd, is experiencing financial difficulties. As a result, Creative Ltd is taking well over 120 days to pay outstanding amounts, despite Creative Ltd's terms of trade being payment within 30 days. Creative Ltd makes up 40 per cent of High Tech Ltd's sales and the board has been reluctant to take any action that might adversely affect those sales. As a result, High Tech Ltd has had to increase its dependency on its line of credit, and this has caused it to temporarily breach the debt to equity ratio required in its loan covenant with Big Bank Ltd.
Required -
(a) Identify two key account balances at risk of material misstatement.
(b) For each account balance identify the key assertion at risk.
(c) Explain why the account balance and assertion are at risk.
(d) Describe one (1) substantive test of detail that you would undertake for each account to address the assertion and risk identified.
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