Question Tag: Revenue and Receivables

You are the audit manager of Onipa Hia & Co., a local firm of Chartered Accountants located in Adabraka in the Greater Accra Region. You are currently reviewing the audit files for several of your clients for which the audit fieldwork is complete. The Audit Senior has raised the following issues:

African Designs Co. Ltd (ADCL)
ADCL’s year-end is 30 September; however, subsequent to the year-end, the company’s sales ledger has been corrupted by a computer virus. ADCL’s Finance Director was able to produce the financial statements prior to this occurring; however, the audit team has been unable to access the sales ledger to undertake detailed testing of revenue or year-end receivables. All other accounting records are unaffected, and there are no backups available for the sales ledger. ADCL’s revenue is GH¢15.6 million, its receivables are GH¢3.4 million, and profit before tax is GH¢2 million.

Ghana Design Co. Ltd (GDCL)
GDCL has experienced difficult trading conditions, and as a result, it has lost significant market share. The cash flow forecast has been reviewed during the audit fieldwork, and it shows a significant net cash outflow. Management is confident that further funding can be obtained and so have prepared the financial statements on a going concern basis with no additional disclosures; the Audit Senior is highly skeptical about this. The prior year’s financial statements showed a profit before tax of GH¢1.2 million; however, the current year’s loss before tax is GH¢4.4 million, and the forecast net cash outflow for the next 12 months is GH¢3.2 million.

Required:
For each of the two issues:
i) Describe the impact on the audit report if the issues remain unresolved. (5 marks)
ii) Recommend procedures the audit team should undertake at the completion stage to try to resolve the issue. (5 marks)