Greenfields Co specialises in manufacturing equipment which can help to reduce toxic emiss

ions in the production of chemicals. The company has grown rapidly over the past eight years and this is due partly to the warranties that the company gives to its customers. It guarantees its products for five years and if problems arise in this period it undertakes to fix them, or provide a replacement product.

You are the manager responsible for the audit of Greenfields and you are performing the final review stage of the audit and have come across the following two issues.

Receivable balance owing from Yellowmix Co

Greenfields has a material receivable balance owing from its customer, Yellowmix Co. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Yellowmix for over six months, and Greenfields would not allow this balance to be circularised. Instead management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Warranty provision

The warranty provision included within the statement of financial position is material. The audit team has performed testing over the calculations and assumptions which are consistent with prior years. The team has requested a written representation from management confirming the basis and amount of the provision are reasonable. Management has yet to confirm acceptance of this representation.

Required:

(a) Describe the audit procedures required in respect of accounting estimates. (5 marks)

(b) For each of the two issues above:

(i) Discuss the appropriateness of written representations as a form. of audit evidence; and (4 marks)

(ii) Describe additional procedures the auditor should now perform. in order to reach a conclusion on the balance to be included in the financial statements. (6 marks)

Note: The total marks will be split equally between each issue.

(c) The directors of Greenfields have decided not to provide the audit firm with the written representation for the warranty provision as they feel that it is unnecessary.

Required:

Explain the steps the auditor of Greenfields Co should now take and the impact on the audit report in relation to the refusal to provide the written representation. (5 marks)