KMG still considers 5 of the vehicle sales price to be a conservative

Kmg still considers 5 of the vehicle sales price to

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reasonable. KMG still considers 5% of the vehicle sales price to be a conservative calculation for the warranty provision. AA notes that as a result of the previous year’s audit procedures, the warranty provision in the prior year was understated by $25,000. Management refused to correct this adjustment, but as misstatements were below materiality individually and in aggregate, an unmodified opinion was issued. Question 2 continues, please turn over
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Audit & Assurance Chartered Accountants Program Page 6 of 14 AAA217 Main exam Question 2 (cont.)Required(a) Identify and explain why the warranty provision is at risk of material misstatement. (8 marks)(b) Describe one way in which AA has applied professional scepticism as part of the risk assessment phase and explain your response.(2 marks) 10 marks Part B (10 marks)It is now July 20X7 and the warranty provision balance for KMG as at 30 June 20X7 is $120,000. The majority of sales made in the last quarter of the year were made in last two weeks of June. The following table was provided to you by the finance team:ModelsNo. of units sold in 3 months to 30 June 20X7Selling price $Total sales $Warranty provision 5% $Claims made on these sales prior to 30 June 20X7 $Warranty provision at 30 June 20X7 $Model 11830,000540,00027,000(4,000)23,000Model 22132,500682,50034,125(6,500)27,625Model 31537,500562,50028,125(4,000)24,125Model 42745,0001,215,00060,750(15,500)45,250Total3,000,000150,000(30,000)120,000The provision is material from both a qualitative and a quantitative perspective. The audit work is commencing on 3 July 20X7. In response to the risks surrounding the warranty provision and the information received, the audit team has designed some of the procedures. However, there are certain procedures that still need to be designed. The table below is an extract from the warranty provision and expense audit plan:ProcedureWarranty provision and expense audit plan [extract]1Obtain a detailed listing of all sales made in the three months prior to 30 June 20X7 and agree each sale to the sales invoice and bank statement. Recalculate the 5% warranty provision amount against total sales. For all claims made on these sales, agree the dollar value to the respective reports held by the finance team. Agree the total to the provision summary table and the trial balance. 2Obtain a detailed analysis of all repairs to and replacements of parts for all models during the year. Make enquiries of the service centre staff, including the head mechanic, to discuss the adequacy of the provision at balance date and the likelihood of further claims on the sales for the last quarter of FY 20X73For the legacy models (models 1, 2 and 3), obtain comparable industry data in relation to the frequency, extent and cost of repairs to parts or the replacement of parts required in the three-month period following sale. Compare findings to the respective warranty provisions for each vehicle and assess the adequacy of each vehicle’s provision in light of this external data and if there are any significant discrepancies, follow these up with management Question 2 continues, please turn over
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Chartered Accountants Program Audit & Assurance AAA217 Main exam
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