Thursday, April 25, 2013

How to identify provision for warranty / goods returned - credit notes review

During the course of your audit, you may note that there is high % of goods returned or customer utilised the warranty provision. Goods returned / utilisation of warranty could be quite common in certain industry, e.g. retail / electornic / mass production industry. What will be the implication to our audit?

In this instance, we should request our audit client to perform a retrospective review of the history of goods returned and determine how many % of total goods sold had been returned to the Company in the past. A provision for goods returned or warranty should be recorded on a monthly basis. This is because, based on historical experience, the Company will not be able to earn 100% of its goods sold / delivered.

A good way for auditor to test / review the goods returned history is to check the credit note issued during the year and check the nature of the credit note. If there is high volume of credit notes being issued for goods returned, then it is important for us to emphasize to client to accrue for provision for gooods returned.

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