Case Study

An audit is being undertaken for Atlantic Ltd for the year ended 30 June 2013. While assessing the risk of material misstatement you identify that a large number of debtors are exceeding 60 days where credit terms are 30 days.

During your analysis the following figures were extracted:

Year end 30/6/2012 - Provision for Doubtful Debts $35,000, Sales $3,500,000

Year end 30/6/2013 - Provision for Doubtful Debts $570,000, Sales $5,700,000

The profit for the year ended 30/6/2013 is $1,500,000.

Questions:

(1) The doubtful debts policy in Atlantic's accounting policy manual is that 1% of sales should be deemed to be doubtful debts. Discuss the relevance of the company policy to the firms' treatment of doubtful debts for the year ended 30/6/2013? How would the auditor determine whether the 30/6/2013 doubtful debts calculation for 2013 is reasonable?

(2) Materiality is an important part of audit considerations. Discuss the nature of materiality and the basis for its calculation. With reference to the audit of Atlantic Ltd, if the calculation of doubtful debts is found to be overstated, explain at what level (or at what amount) you would expect the variance to be material and therefore request the company to alter their estimate in the accounts.