Audit response to inventory and receivables risks

Dear tutor,

can you please explain why the answer to the following question is the first option for both inventory and receivables? i.e Extend cut-off testing

Thank you!

“As of 1 July 20X5, you are working as an audit manager at Wood & Co and are preparing the audit for Glass Co, which is a new client of the firm with a financial year ending 30 June 20X5. Glass Co is a large mobile phone retailer operating a chain of stores across several European countries.

You have received planning notes from the audit engagement partner following a meeting with the finance director.

During the year, the company introduced a sales-based bonus scheme for its sales staff. The bonus was linked to increasing the number of customers signing 24-month mobile contracts. This initiative proved successful, with revenue rising by 15% compared to 20X4. Notably, sales increased significantly in May and June 20X5.

Suppliers of mobile phones typically launch new models with enhanced features every year. When these new models are released, Glass Co offers substantial discounts on older phone versions.

You have been asked to carry out an initial analytical review of the draft financial statements and have been given the following information:

$ 20X5 – 20X4
Revenue 1,267,000 – 1,205,000
Cost of sales 1,013,000 – 965,000
Receivables 121,000 – 100,000
Payables 87,500 -85,000
Inventory 160,000 – 125,000
Cash 123,000 – 140,000

Question: Which of the following does not represent a suitable audit response to the significant risks associated with inventory and receivables?

Inventory

Extend cut-off testing

Evaluate controls over inventory management

Discuss slow-moving inventory with the finance director

Carry out testing of sales invoices after the year end

Receivables

Extend cut-off testing

Review controls related to debt collection

Discuss overdue receivables with the finance director

Perform testing of cash received after the year end”