Herzog

You are Saul Shouts, the audit manager responsible for the audit of Herzog Co, a limited liability company. Herzog manufactures computer-controlled machinery for production-line industries such as cars, washing machines, cookers, etc. On 1 September 20X2, the shareholder-managers decided, unanimously, to accept a lucrative offer from a multi-national corporation to buy the company's patented technology and manufacturing equipment.

You are about to commence planning the audit for the year ending 31 December 20X2, and you have received an email from Paul Bellow, the audit engagement partner.

To: Saul Shouts

From: Paul Bellow

Subject: Herzog Co - audit planning Hello

(a) Identify and explain the risks of material misstatement to be taken into account in planning the audit.

(b) Explain how the extent of the reliance to be placed on:

(i) Analytical procedures

(ii) Written representations

should compare with that for the prior year audit.

(c) Describe the principal audit procedures to be performed in respect of the carrying amount of the following items in the statement of financial position.

(i) Amounts due from distributors

(ii) Lease liabilities

Thank you.

By 10 September 20X2 management had notified all the employees, suppliers and customers that Herzog would cease all manufacturing activities on 31 October 20X2. The 200-strong factory workforce and the majority of the accounts department and support staff were made redundant with effect from that date, when the sale was duly completed.

The marketing, human resources and production managers will cease to be employed by the company at 31 December 20X2. However, the chief executive, sales manager, finance manager, accountant and a small number of accounting and other support staff expect to be employed until the company is wound down completely.

Herzog's operations extend to fourteen premises, nine of which were put on the market on 1 November 20X2. Herzog accounts for all tangible non-current assets under the cost model (ie at depreciated cost). Four premises are held on leases that expire in the next two to seven years and cannot be sold or sub-let under the lease terms. The small head office premises will continue to be occupied until the lease expires in 20X5. No new lease agreements were entered into during 20X2.

All Herzog's computer-controlled products carry a one-year warranty. Extended warranties of three and five years, previously available at the time of purchase, have not been offered on sales of remaining inventory from 1 November onwards.

Herzog has three-year agreements with its national and international distributors for the sale of equipment. It also has annual contracts with its major suppliers for the purchase of components. So far, none of these parties have lodged any legal claim against Herzog. However, the distributors are withholding payment of their account balances pending settlement of the significant penalties which are now due to them.

Required

Respond to the email from the audit engagement partner.