You are the audit manager of East & Co – reviewing the key issues
You are the audit manager of East & Co and are reviewing the key issues identified in the files of two audit clients.
Gulf Industries Co (Gulf)
You are the audit manager of East & Co – reviewing the key issues
University of Aberdeen Business School
AC3560 Audit Practice 2020/21
Answer all of Sections A and B and C
Section A
You are the audit manager of East & Co and are reviewing the key issues identified in the files of two audit clients.
Gulf Industries Co (Gulf)
Gulf’s year end was 31 March 2020 and the draft financial statements show revenue of £28·2 million, receivables of £5·6 million and profit before tax of £4·8 million. The fieldwork stage for this audit has been complete.
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Order Paper NowA long-standing customer of Gulf owed an amount of £350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Gulf from this customer as they were disputing the quality of certain goods received from Gulf. The finance director is confident the issue will be resolve. No allowance for receivables was make with regards to this balance.
Sea Trading Co (Sea)
Sea is a new client of East & Co, its year end was 31 January 2020 and the firm was only appointed auditors in February 2020, as the previous auditors were suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.
The inventory count at Sea’s warehouse was undertaken on 31 January 2020. It was overseen by the company’s internal audit department. Neither East & Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year end.
The draft financial statements show a profit before tax of £2·4 million, revenue of £10·1 million and inventory of £510,000.
Required: For each of the two issues:
Firstly, discuss the issue, including an assessment of whether it is material. (20 Marks)
Secondly, recommend ONE procedure the audit team should undertake to try to resolve the issue. (10 marks)
Finally, describe the impact on the audit report if the issue remains UNRESOLVED. (10 marks)
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