a) Audit Procedures to Validate Accounting Estimates:

1. Inquire of Management: Inquire how the accounting estimate is made and the data on which it is based.
2. Post-Year-End Events: Determine whether events occurring up to the date of the auditor’s report (after the reporting period) provide audit evidence regarding the accounting estimate.
3. Review Measurement Methods: Review the method of measurement used and assess the reasonableness of assumptions made.
4. Test Controls: Test the operating effectiveness of the controls over how management made the accounting estimate.
5. Estimate Comparison: Develop an expectation of the possible estimate (point estimate) or a range of amounts to evaluate management’s estimate.
6. Review Management’s Judgments: Review the judgments and decisions made by management in the making of accounting estimates to identify whether there are indicators of possible management bias.
7. Evaluate Overall Reasonableness: Evaluate overall whether the accounting estimates in the financial statements are either reasonable or misstated.
8. Disclosure Review: Obtain sufficient appropriate audit evidence about whether the disclosures in the financial statements related to accounting estimates and estimation uncertainty are reasonable.
9. Written Representations: Obtain written representations from management and, where appropriate, those charged with governance whether they believe significant assumptions used in making accounting estimates are reasonable.

b)

Receivables Balance Owing from Obey Company Ltd:

i) Appropriateness of Written Representations as Audit Evidence:

• The written representation proposed by management is intended to verify the valuation, existence, and rights and obligations of a material receivables balance. However, as management has refused to allow the auditor to circularize the balance and there has been little activity on the account for the past eight months, there is very little evidence that the auditor has obtained.
• This representation would constitute entity-generated evidence, which is less reliable than auditor-generated evidence or evidence from an external source. However, if related control systems operate effectively, then this evidence becomes more reliable. In addition, if the representation is written as opposed to oral, this will increase the reliability as an evidence source.
• Overall, this representation is a weak form of evidence, as there were more reliable evidence options available, such as the circularization, but this was not undertaken.

(2 marks)

ii) Additional Procedures to Conclude on the Receivable Balance:

1. Discuss with Management: Discuss with management the reasons why a circularization request was refused.
2. Post-Year-End Payments: Review the post-year-end period to identify whether any cash has now been received from Obey Company Ltd.
3. Correspondence Review: Review correspondence with Obey Company Ltd to assess reasons for the continued non-payment.
4. Legal Review: Review board minutes and legal correspondence to assess whether any legal action is being taken to recover the amounts due.
5. Provision Consideration: Discuss with management whether a provision or write-down is now required.
6. Audit Opinion Impact: Consider the impact on the audit opinion if the balance is considered to be materially misstated.

(3 points for 3 marks)

Warranty Provision:

i) Appropriateness of Written Representations as Audit Evidence:

• In this case, the auditor has performed some testing of the provision to obtain auditor-generated evidence. The team has tested the calculations and assumptions. None of this is evidence from an external source.
• The very nature of this provision means that it is difficult for the auditor to obtain a significant amount of reliable evidence as to the level of future warranty claims. Hence, the written representation, whilst being an entity-generated source of evidence, would still be useful as there are few other alternatives.

(2 marks)

ii) Additional Procedures to Conclude on the Warranty Provision:

1. Post-Year-End Claims: Review the post-year-end period to compare the level of claims actually made against the amounts provided.
2. Historical Comparison: Review the level of prior year provisions with the amounts claimed to assess the reasonableness of management’s forecasting.
3. Board Minutes Review: Review board minutes to assess whether any changes are required to the level of the provision as a result of an increased or decreased level of claims by customers.

(3 points for 3 marks)

c) Steps if Written Representation on Warranty Provision is Not Provided:

1. Discuss with Management: ISA 580 “Written Representations” guides the auditor when written representations are requested from management, but they refuse to provide. If management does not provide the requested written representation on the warranty provision, the auditor should discuss the matter with management to understand why they are refusing.
2. Reevaluate Integrity: Reevaluate the integrity of Oliso Private Company Ltd’s management and consider the effect that this may have on the reliability of other representations (oral or written) and audit evidence in general.
3. Determine Audit Opinion: Determine the possible effect on the audit opinion. If the auditor cannot obtain sufficient appropriate evidence to conclude that the warranty provision is free from material misstatement, a modified audit opinion will be required.
4. Modify Audit Opinion: The warranty provision is material but not pervasive, and therefore a qualified opinion would be appropriate. The opinion paragraph will be amended to state ‘except for’ the lack of evidence on the warranty provision, the financial statements show a true and fair view.
5. Basis for Opinion Paragraph: The audit report will require an additional paragraph known as the basis for the qualification paragraph after the opinion paragraph, which will describe the reason for the modification, namely management’s refusal to provide a written representation in relation to the warranty provision and hence the reason for the except-for opinion. The materiality of the warranty provision will be stated in the basis for the opinion paragraph.