Week 11 - Question Five

The following information relating to Tedy Brown’s operations has been identified:

Issue 1

Tedy Brown has an accounts receivable insurance policy that allows the company to claim for bad debts of up to $50 000 per annum. The amount covered under the policy has remained the same since 2012 (when the accounts receivable balance averaged $2 000 000). Since 2012, the average accounts receivable balance has increased to $3 800 000.

Issue 2

Tedy Brown sales representatives are entitled to commission on sales above quarterly targets. Any commission earned is required to be paid in the month following the quarter. In the year ended 30 June 2015, on two occasions, the commissions were paid three months following the quarter.

Issue 3

There were numerous occasions during the year where major debtors, representing 40 per cent of gross revenues, settled their accounts 45 days after the due date. These debtors have been longstanding and reliable customers.

Issue 4

Tedy Brown does not enter into foreign exchange contracts to fix its exposure to foreign currency movements, as it has never previously suffered significant foreign currency losses. During the year ended 30 June 2015, Tedy Brown incurred foreign exchange losses representing 10 per cent of net profit before income tax.

Required:

(a) Identify which two (2) items are primarily relevant only to the head of internal audit. Justify your answer.

(b) Identify which two (2) items are significant and direct concerns for both the external auditor and the head of internal audit. Justify your answer.