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res machine agricultural and header

res machine agricultural and header

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question 4 Substantive testing at Rodan Ltd Rodan manufactures machine parts which are used for servicing agricultural equipment including tractors and headers throughout Australia. During the planning stage of the audit of Rodan, it was found that one of their key suppliers had gone into administration which had led to shortages of raw materials. In order to circumvent this problem, Rodan secured the supply of materials through an another supplier, however the alternative supplier is new to the market and Rodan's production staff have been complaining that the materials are of inferior quality. Rodan has also suffered from cash flow problems recently as one of their debtors, Pattison Ltd, has also been experiencing financial problems, taking up to 5 months to pay amounts which are normally due within 30 days. Pattison makes up 33% of Rodan's sales and management wish to maintain a good relationship with Pattison. The resulting cash flow implications has meant that Rodan has been drawing on its lines of credit, which have subsequently caused it to temporarily violate the terms of its contract with its bank, ZŚBC, which requires Rodan to maintain a current ratio of 1.8:1. Required: Identify (2) two key account balances at risk of material misstatement. For each account balance, identify the key assertion at risk. Justify why the account balances and assertions are at risk. Outline two (2) substantive tests of detail that you could undertake for each account to address the assertion and risk identified.
Transcribed Image Text:Question 4 Substantive testing at Rodan Ltd Rodan manufactures machine parts which are used for servicing agricultural equipment including tractors and headers throughout Australia. During the planning stage of the audit of Rodan, it was found that one of their key suppliers had gone into administration which had led to shortages of raw materials. In order to circumvent this problem, Rodan secured the supply of materials through an another supplier, however the alternative supplier is new to the market and Rodan's production staff have been complaining that the materials are of inferior quality. Rodan has also suffered from cash flow problems recently as one of their debtors, Pattison Ltd, has also been experiencing financial problems, taking up to 5 months to pay amounts which are normally due within 30 days. Pattison makes up 33% of Rodan's sales and management wish to maintain a good relationship with Pattison. The resulting cash flow implications has meant that Rodan has been drawing on its lines of credit, which have subsequently caused it to temporarily violate the terms of its contract with its bank, ZŚBC, which requires Rodan to maintain a current ratio of 1.8:1. Required: Identify (2) two key account balances at risk of material misstatement. For each account balance, identify the key assertion at risk. Justify why the account balances and assertions are at risk. Outline two (2) substantive tests of detail that you could undertake for each account to address the assertion and risk identified.
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