It is 1 July 20X5. You are an audit supervisor with Woodward & Co and you are in the process of planning the audit of Co

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It is 1 July 20X5. You are an audit supervisor with Woodward& Co and you are in the process of planning the audit of CorleyAppliances Co, a company which sells domestic electricalappliances such as fridge freezers, TVs and washing machines. Thecompany’s year end is 31 August 20x5 and forecast revenue for theyear is $12.2m, total assets are $6.8m and profit before tax is$2.8m. The audit manager held a meeting with the finance directorand the notes from that meeting are provided below: Notes frommeeting with finance director
The company operates nationwide with20 branches located across the country and sells goods to membersof the public and to retailers. The company has a returns policywhich allows a customer to return goods within 28 days of purchaseif they are not satisfied with the product. Historically, 5% ofcustomers return goods within the return period. The company alsoprovides a six-month warranty on its products which requires CorleyAppliances Co to repair any defects, at its own cost, which arisewithin the warranty period. It is anticipated that the warrantyprovision in the draft financial statements will be lower than theprior year as the directors are confident the products sold by thecompany are built to a very high standard. The company is based inEurope and its main supplier of appliances is based in Asia. Goodsare shipped to the company’s central warehouse by sea and areusually in transit for up to one month. Corley Appliances Co hasresponsibility for goods in transit from the point of dispatch bythe supplier. The central warehouse and all 20 branches will becarrying out a full year-end inventory count on 31 August 20X5 andit is expected that the value of inventory in Corley AppliancesCo’s financial statements will be $0.95m. Over the last six months.the finance director has noticed that the company's receivablescollection period is now an average of 55 days, whereas thecompany’s target is 42 days. The credit controller has informed thefinance director that she is confident that all receivables willeventually pay as increases in receivables collection periods arestarting to become common in the industry. The finance directorbelieves it is unlikely that any increase in the allowance forreceivables will be necessary at the year end as compared to theprior year. In June 20X5, a fraud was uncovered in the financedepartment. A payables ledger supervisor had diverted funds fromthe company’s bank account using a fictitious supplier on thepayables ledger. The employee was immediately dismissed, and thevalue of the fraud will be recognised as an expense in thestatement of profit or loss. Since the dismissal of the supervisor,purchase invoices have not been recorded in the payables ledger andit is unlikely that this backlog of invoices will be cleared by theyear end. During the year, the company purchased and installed anew automated dispatch system for its central warehouse. The costof the dispatch system was $0.9m and has been recognised as anaddition to property, plant and equipment. These capitalised costsinclude the purchase price of $0.6m, installation costs of $0.2mand staff training costs of $0.1m. Due to the costs incurred inpurchasing the new dispatch system and the increase in thereceivables collection period. the company’s overdraft facility hasincreased significantly and at one point went over the agreed limitof $0.7m in early June 20X5. The bank has expressed concern aboutthe way that the company is operating its bank overdraft and adecision will be made in November 20X5 as to whether the bank willcontinue to provide this overdraft facility, which the company isdependent on. The auditor’s report is due to be signed in October20X5. Requirement
(b) Define the term 'professional scepticism' andexplain TWO (2) examples from the audit of Corley AppliancesCo.where the auditor should apply professionalscepticism.