Reference no: EM132493261
Question 1 - You are the audit senior at Brown & Associates and have been assigned to the audit of Location Ltd. (Location) for the year ended June 30, 2019. Location manufactures GPS navigation systems for motor vehicles and exports these to car manufacturers in South Korea and Japan. The South Korean market has grown rapidly over the past two years and has become the company's most significant customer base, representing 75 per cent of Location's revenue. All contracts are payable in US dollars. In the past three months, the volume of orders from Location's South Korean customers has fallen 20 per cent, and two major customers have requested extended payment terms. Location is also under pressure from Chinese competitors who have undercut Location's prices by 25 per cent.
Required -
a) Identify two significant statement of financial position accounts at risk of material misstatement and provide a brief explanation of why each is at risk.
b) Identify the key assertion that is affected for each account identified in (a).
c) For each of the accounts and the associated key assertions you identified above, recommend a specific substantive test of detail that would be most responsive to the risk identified.
Question 2 - Consider each of the following material independent situations: i) You are auditing the accounts payable and purchases of XYZ Pty Ltd. (XYZ). One of XYZ's major creditors, JKL Ltd. (JKL), is very slow in sending invoices for goods delivered. Also, due to quality control problem at JKL, a large number of goods supplied to XYZ have been deemed faulty and have had to be returned to JKL with a request for credit. ii) You are auditing the accounts receivable and sales of Middle Eastern Traders Ltd. (MET). All of MET's customers are in the Middle East. Due to language differences, and the current political situation in many countries, direct confirmation of accounts receivable balances is unlikely to result in satisfactory results.
Required -
a) List the key audit assertion(s) at risk in relation to the balances described in each of the situations above.
b) Outline the audit procedures you would perform in order to gather sufficient, appropriate audit evidence for each of these assertions.