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.
(1) The doubtful debts policy in Atlantic’s accounting policy manual is that 1% of sales must be deemed to be doubtful debts. describe the relevance of the company policy to the firms’ treatment of doubtful debts for the year ended 30/6/2013? How will the auditor determine whether the 30/6/2013 doubtful debts calculation for 2013 is reasonable?
(2) Materiality is the significant part of audit considerations. describe 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, describe at what level (or at what amount) you will expect the variance to be material and thus request the company to alter their estimate in the accounts.