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following scenario: feet co makes & sells womans shoes. you are assigned as audit senior for y/e 31 dec 2013. feet co offers one month refund period on all shoes. management at feet co have said that they will estimate the figure for returns relating to 2013, based on sales expected between 1 jan 2014 & 31 march 2014. they will then make a provision for it in financial statements for y/e 31 dec 2013. provision is likely to be material.
can u please answer the following question for me
state the audit risk and describe 3 substantive procedures you would perform to obtain sufficient appropriate evidence in relation to the matter above.(4marks)Audit risk = material misstatement in the estimate of the provision for returns. Not sure why they are basing the provision on future sales experience rather than past sales experience of returns.
Audit evidence:
Wait and see what the returns in January actually are and use that for the provision
Reperform the company’s calculations and assess for reasonablness.
Perform analytical reviews on this year’s provision compared to last year’s.
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