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Question 4c

You are the manager responsible for the audit of Osier Co, a jewellery manufacturer and retailer. The final audit for the year ended 31 March 2017 is nearing completion and you are reviewing the audit working papers. The draft financial statements recognise total assets of $1,919 million (2016 – $1,889 million), revenue of $1,052 million (2016 – $997 million) and profit before tax of $107 million (2016 – $110 million). Three issues from the audit working papers are summarised below:

(c) Warranty provision
Each year management makes a provision for jewellery returned under warranty. It is based upon an estimate of
returns levels for each product type (rings, bracelets, necklaces, watches, earrings, etc) and is calculated on an
annual basis by the sales director. The breakdown for the current provision, as extracted from the notes to the
financial statements, is as follows:

$million
At 1 April 2016 11·5
Provisions charged during the year 0·5
Provisions utilised during the year (1·9)
Unutilised provisions reversed (3·1)
At 31 March 2017 7·0
(6 marks)

Required:
Comment on the matters to be considered, and explain the audit evidence you should expect to find during your file review in respect of each of the issues described above.

Note: The split of the mark allocation is shown against each of the issues above. You are not required to discuss any potential implications for the auditor’s report.

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