ISA 560 Subsequent events provides guidance on the responsibilities of auditors regarding subsequent events. You are required
Question:
- ISA 560 Subsequent events provides guidance on the responsibilities of auditors regarding subsequent events. You are required to explain the responsibilities of auditors for facts discovered up to the date of the auditor’s report, facts discovered after the date of the auditor’s report but before the accounts are issued and for facts discovered after the financial statements have been issued.
ISA 580 Written representations explains the purpose and use of written representations as audit evidence. You are required to state five (5) items that could be included in a written representation.
You are the audit manager in charge for the audit of CETAMOB Limited, a company which sells mobile phones. The company has 10 stores in Cyprus in all major cities. The audit has been finalized but there are some issues that remain unresolved:
Unresolved issues
The company is providing its customers with a 2-year guarantee on the purchase of a mobile phone. Past experience has shown that 15% of the customers return their phones during the first year for repairs and an additional 10% during the last year of guarantee.
The cost for the repair per phone is on average €40. The directors feel that a provision should not be made since they prefer to recognize this cost in the year in which the cost will be incurred.
The results of the year end inventory count showed that the Net Realizable Value (NRV) of inventory is well below the cost which is included in the financial statements due to the fact that the majority of mobile phone models are out of date. The directors do not want to make an adjusting entry to reflect the change in the value of the inventory, due to impairment.
Assuming that the effect of the unresolved issued is material to the financial statements, please proceed with the below questions.
Required
Explain the appropriate treatment in the financial statements for the above two matters.
If the matters remain unresolved, state the effect of each matter on the audit report.
Financial Accounting Theory and Analysis Text and Cases
ISBN: 978-0470646281
10th edition
Authors: Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey