Reference no: EM132877353

Evaluating substantive testing results

The following items are documented in the audit working papers.

1. Sales transaction included in the year ended June 2020 but evidence from the cut-off procedure suggests that the sale should be dated 1 July 2020 ($590 000).

2. Warranty expenses in the trial balance for the year to June 2020 total $130 000; the provision for warranty claims as at 30 June 2019 was $110 000. Evaluation of correspondence suggests that an additional $175 000 in warranty claims could result from ongoing disputes with customers. No provision for these claims has been made. Management has made a warranty provision for 2020 of $125 000.

3. Redundancy expenses related to reorganisation of head office administration incorrectly charged to rental expenses ($884 770).

4. No expense for impairment of assets has been made by management. A drought-induced recession has adversely affected property values in regional cities where seven branch offices are located (head office and two branch offices are located in the capital city). Total land and buildings in the trial balance is $22 000 000 and management estimate that the value of these assets is impaired by 10 per cent.

Required

Problem (a) Evaluate each item and explain whether it is an error or a judgemental misstatement. What action do you recommend for each?

Problem (b) Which accounts would be affected, and how, if an adjustment is made for each item?