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Question 1 - Willow Co

The document outlines audit work for Willow Co, focusing on inventory, provisions, and current assets. It emphasizes the importance of materiality in financial statements and the need for sufficient audit evidence, particularly regarding inventory valuation, legal provisions, and related party transactions. Recommendations for additional audit procedures are provided to ensure compliance and accuracy in financial reporting.

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16 views3 pages

Question 1 - Willow Co

The document outlines audit work for Willow Co, focusing on inventory, provisions, and current assets. It emphasizes the importance of materiality in financial statements and the need for sufficient audit evidence, particularly regarding inventory valuation, legal provisions, and related party transactions. Recommendations for additional audit procedures are provided to ensure compliance and accuracy in financial reporting.

Uploaded by

atiqrhmn6
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Question 1 - Willow Co

(i) Audit work on inventory

The materiality level is $800,000 for asset and liabilities and $250,000 for income and
expenses. Printed inventory item worth $130,000, therefore it is immaterial to
financial statements individually. However, it may be material when aggregated with
other material misstatements.

Inventory should be valued at lower of cost and net realisable value. If the inventory is
not usable or recyclable in future, the net realisable value will be zero and it should be
written off. The inventory written off will reduced the assets and profit of the company.

If the inventory written off adjustment were not made to the financial statements, as
the inventory individually immaterial to financial statements therefore, it will have no
impact on the audit opinion.

A written representation has been requested on this matter. Written Representations


can provide necessary audit evidence, but they do not provide sufficient appropriate
audit evidence on their own about any of the matters with which they deal.

The written representation is insufficient audit evidence, and further audit procedures
are necessary to determine whether the potentially obsolete items are made from
material that can be recycled.

Other evidence regarding the inventory should be obtained by performing these


additional procedures:

 Physically inspect the items to verify if some of the material could be recycled or
not.
 Enquire of relevant personnel such as a production manager whether the plastic
coating is unsuitable for recycling by the company.
 Discuss with management whether any potential buyer specialising in recycling
plastic material available to purchase the inventory for recycling to verify the
net realisable value.
 Review any invoices raised after the year end for evidence that the items have
been sold, to determine whether a net realisable value exists.

(ii) Audit work on provisions

The materiality level is $800,000 for asset and liabilities and $250,000 for income and
expenses. Legal claim worth $125,000, therefore it is immaterial to financial
statements individually. However, when aggregated with inventory misstatement of
$130,000, So aggregated misstatement is 255,000. Which material to financial
statements.

Provision should be recorded when there is current obligation as a result of past event
and there is probable outflow. The provision should be recorded of $125,000 as Willow
Co’s lawyer said that the claim is probable. The financial statements should be
adjusted to provision in liabilities and increase in operating expenses.

Total misstatement is material to profit and, if adjustments that we consider necessary


after the completion of audit procedures are not made, we should consider the
implication for the audit opinion as the financial statements would be materially
misstated. In this case a qualified opinion would be appropriate.

Audit evidence indicates that the amount is probable to be paid. However, our
conclusion is based on a verbal confirmation from Willow Co’s lawyers. Which is not
appropriate audit evidence.

Audit evidence in documentary form, whether paper, electronic, or other medium, is


more reliable than evidence obtained orally. We should therefore seek a more reliable
source of evidence than a verbal confirmation.

We should ask for a written confirmation from the lawyers on their opinion of whether
the amount is probable to be paid. The fact that Cherry has refused our request to ask
for this evidence is a matter to be brought to the attention of the audit committee.

Other evidence regarding the provision should be obtained by performing these


additional procedures:

 Review correspondence between the lawyers and Willow Co for indications that
the lawyers have stated in that correspondence their opinion on the outcome of
the legal claim.
 Review board minutes for evidence that the outcome of the legal claim has been
discussed.
 Discuss the matter with any internal legal expert of Willow Co to assess the
chances of claim to be successful.

(iii) Audit work on current assets

Loan to Cherry laurel is $6000, which is immaterial in monetary terms to financial


statements. However, the loan to Cherry Laurel is a related party transaction, as
Cherry laurel is Key management personnel of the company. Therefore, it is material
by nature.

Disclosure is required in the notes to the financial statements of the nature of the
related party relationship and information about the transaction including the amount
of the transaction and the amount outstanding, the terms and conditions and whether
the balance is secured.

If this disclosure is not provided, the financial statements will be materially misstated.
Accordingly, we should consider the implication for the audit opinion, which would be
qualified as the misstatement is material but not pervasive.

An additional consideration is whether any interest has been recorded as receivable.


The amount would be immaterial individually, as interest due is of only $40 would
have paid by the year.
Other evidence regarding the current assets should be obtained by performing these
additional procedures:

 Obtain the written terms of the loan to confirm an interest rate of 4% and to
review for any other terms and conditions.
 Review the loan account in the general ledger for other movements in the year,
whether other loans were made and paid back prior to the advance of $6,000.
 Inspect the cash book for evidence that interest payments have been made by
Cherry. If not, ensure the interest due is included in accrued income.

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