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MC Question 14

Cannavaro.com is a website design company whose year end was 31 December 20X4. The audit is almost complete and the financial statements are due to be signed shortly. Profit before tax for the year is $3·8 million and revenue is $11·2 million.

The company has only required an audit for the last two years and the board of directors has asked your firm to provide more detail in relation to the form and content of the auditor’s report.

During the audit it has come to light that a key customer, Pirlo Co, with a receivables balance at the year end of $285,000, has just notified Cannavaro.com that they are experiencing cash flow difficulties and so are unable to make any payments for the foreseeable future. The finance director has notified the audit team that he will write this balance off as an irrecoverable debt in the 20X5 financial statements.

The audit engagement partner requires you to perform additional procedures in order to conclude on the level of any adjustment needed in relation to the outstanding balance with Pirlo Co.

Which TWO of the following audit procedures should be performed to form a conclusion as to whether the financial statements require amendment?

(1) Discuss with management the reasons for not amending the financial statements
(2) Review the cash book post year end for receipts from Pirlo Co
(3) Send a request to Pirlo Co to confirm the outstanding balance
(4) Agree the outstanding balance to invoices and sales orders

A. 1 and 2
B. 1 and 4
C. 2 and 3
D. 2 and 4