ExpertACCA · Question 13 · Audit and Assurance
CASE 3: AEROFORGE HEAVY INDUSTRIES
AeroForge Heavy Industries manufactures industrial turbines. The manufacturing process takes 8 months per turbine. At year-end, there is significant Work-in-Progress (WIP). AeroForge provides a 5-year warranty on all turbines. During the year, a major customer sued AeroForge for $2m due to a turbine failure; AeroForge's lawyers believe a payout is 'possible' but not 'probable'. AeroForge revalued its manufacturing plant this year, resulting in a $5m revaluation surplus.
QUESTION:
Which of the following is the most appropriate audit procedure to test the VALUATION of the 5-year warranty provision?
CASE 3: AEROFORGE HEAVY INDUSTRIES
AeroForge Heavy Industries manufactures industrial turbines. The manufacturing process takes 8 months per turbine. At year-end, there is significant Work-in-Progress (WIP). AeroForge provides a 5-year warranty on all turbines. During the year, a major customer sued AeroForge for $2m due to a turbine failure; AeroForge's lawyers believe a payout is 'possible' but not 'probable'. AeroForge revalued its manufacturing plant this year, resulting in a $5m revaluation surplus.
QUESTION:
Which of the following is the most appropriate audit procedure to test the VALUATION of the 5-year warranty provision?
Answer options:
Inspect the sales contracts to confirm that a 5-year warranty is legally offered to customers.
Review the historical level of warranty claims made over the last 5 years and compare them to the current provision estimate.
Obtain a written representation from the lawyers confirming the warranty terms.
Vouch a sample of warranty repair costs incurred during the year to purchase invoices.
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