Gikomba Limited is medium –sized manufacturing company domicile in Nairobi. During the year ended 31 March 2009, the turnover of the company was sh. 230 million while its trade receivables amounted to sh. 23 million. The trade receivables comprised 2,000 different companies and individuals with amounts owed ranging from sh. 5,000 to sh. 500,000.
You have been assigned the audit of the trade receivables of Gikomba limited by your audit senior. From initial enquires, you establish that the company had expensed in its income statement bad debts of sh. 1,800,000 and made a general provision of sh. 1,400,000 for doubtful debts. The general provision for doubtful debts of the company is based on a percentage of the trade receivables as at 31 March each year.
Required
(i) Explain the audit approach an auditor should adopt in order to obtain sufficient and appropriate audit evidence regarding accounting estimates (3marks)
(ii) Describe the audit procedure you would undertake in verifying the amount of bad debts included in the financial statements of Gikomba Limited for the year ended 31 March 2009. (9marks)
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