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You are the audit manager of Chestnut & Co and are reviewingthe key issues identified in the files of two audit clients.

Palm Industries Co (Palm)

Palm’s year-end was 31 March 2015 and the draft financialstatements show revenue of $28·2 million, receivables of $5·6million and profit before tax of $4·8 million. The fieldwork stagefor this audit has been completed.

A customer of Palm owed an amount of $350,000 at the year-end.Testing of receivables in April highlighted that no amounts hadbeen paid to Palm from this customer as they were disputing thequality of certain goods received from Palm. The finance directoris confident the issue will be resolved and no allowance forreceivables was made with regards to this balance.

Ash Trading Co (Ash)

Ash is a new client of Chestnut & Co, its year-end was 31January 2015 and the firm was only appointed auditors in February2015, as the previous auditors were suddenly unable to undertakethe audit. The fieldwork stage for this audit is currentlyongoing.

The inventory count at Ash’s warehouse was undertaken on 31January 2015 and was overseen by the company’s internal auditdepartment. Neither Chestnut & Co nor the previous auditorsattended the count. Detailed inventory records were maintained butit was not possible to undertake another full inventory countsubsequent to the year-end.

The draft financial statements show a profit before tax of $2·4million, revenue of $10·1 million and inventory of $510,000.

Required:

For each of the two issues:

(i) Discuss the issue, including an assessment of whether it ismaterial;

(ii) Recommend ONE procedure the audit team should undertake totry to resolve the issue; and

(iii) Describe the impact on the audit report if the issueremains UNRESOLVED.