You are an audit senior in Raisin & Co, a firm of Chartered Certified Accountants. You are temporarily assigned as audit senior to the audit of Sultana Co, a scaffolding specialist supplying the construction industry, after the senior on the engagement fell ill. The final audit of Sultana Co for the year ended 30 September 20X9 is nearing completion, and you are now reviewing the audit files and discussing the audit with the junior members of the audit team.
Sultana Co’s draft financial statements show revenue of $12.5 million, net profit of $400,000, and total assets of $78 million.
The following information has come to your attention during your review of the audit files.
After the year end, Cherry Co, a major customer with whom Sultana Co has several significant contracts, announced its insolvency. Procedures to shut down the company have commenced. The administrators of Cherry Co have suggested that the company may be able to pay approximately 25% of the amounts owed to Sultana Co. A trade receivable of $300,000 is recognised on Sultana Co's statement of financial position in respect of this customer.
In addition, one of the junior members of the audit team has voiced concerns over how the audit had been managed. The junior said the following.
'I have only worked on two audits prior to being assigned the audit team of Sultana Co. I was expecting to attend a meeting at the start of the audit, where the partner and other senior members of the audit team discussed the audit, but no meeting was held. In addition, the audit manager has been away on holiday for three weeks, and left a senior in charge. However, the senior was busy with other assignments, so was not always available.
'I was given the task of auditing the goodwill which arose on an acquisition made during the year. I also worked on the audit of inventory, and attended the inventory count, which was quite complicated, as Sultana Co has a lot of work-in-progress. I tried to be as useful as possible during the count, and helped the client's staff count some of the raw materials. As I had been to the inventory count, I was asked by the audit senior to challenge the finance director regarding the adequacy of the provision against inventory, which the senior felt was significantly understated.
'Lastly, we found that we were running out of time to complete our audit procedures. The audit senior advised that we should reduce the sample sizes used in our tests as a way of saving time. He also suggested that we should select items which would be quick to audit when carrying out audit sampling.’
Comment on the matters to be considered, and explain the audit evidence you should expect to find during your file review in respect of the trade receivable recognized in relation to Cherry Co.
Evaluate the audit junior's concerns regarding the management of the audit of Sultana Co.