Your firm is a China-based CPA firm, called Jun & Hui CPA Ltd (JH). JH has recently accepted the work of external audit of Red Flag Scientific Co (RF), a research company to develop new vaccines for international disease control use. You are the audit senior responsible for RF's financial statements for the year ended at 31 Dec 2020.

Due to COVID-19, RF inputs significant human resources and capital resources into the research and development (R&D) phases of the vaccine to address the epidemic. The global

R&D activity to develop a vaccine against the disease is very competitive and intense. One of the condition to manufacture a vaccine against the novel coronavirus is to meet the strict

medical regulation as well as sufficient human tests before sales to the market. The qualified medical license must be granted. The results of research and development are monitored

closely by the national license authority.

At the end of the year 2020, Narro Co, a key customer of RF Co with several projects, declared that it’s insolvent and the company startsto shut down. The administrator of Narro Co evaluates that the company may only be able to pay 10% of the amounts owed to its supplier.

Following draft extracts from the financial statements of RF, as prepared by the RF’s financial controller.

Following draft extracts from the financial statements of RF, as prepared by the RF’s financial controller.

2020 (draft) RMB'000 2019 (audited) RMB'000

Revenue 120,716 101,514

Cost of sales (52,154) (50,899)

Gross profit 68,562 50,615

Net Cash Flow (3,600) 18,000

R&D cash outflow in this year (9,000) (8,400)

In addition:

•

Accounts receivable from Narro Co is RMB 8M in 2020 and RMB 6M in 2019.

•

Total assets in the statement of financial position is RMB 600M in 2020 and RMB 585M

in 2019.

•

Gearing ratio (Debt/Equity) is 0.85 in 2020 and 0.88 in 2019.

Required:

(a) Identify the matters that should be considered in relation to Red Flag Co’s research and development expenditure in planning the audit.

(b) State the matters to be considered in relation to the accounts receivable from Narro Co, in line with IAS 39 Financial Instruments: Recognition and Measurement.

(c) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to Narro’s accounts receivable.