Reference no: EM132598495

You are the manager on the audit of Nobel Sdn. Bhd., a listed company, which manufactures automotive parts and air-conditioners for motor vehicle assemblers. Annual sale of the Company is RM 85 million and profit before tax is RM60 million.

Your review of the audit working paper file has disclosed the following outstanding issues:

(i) The company is facing a potential legal claim from MML Sdn Bhd. in respect of defective air conditioners supplied to MML. A claim for RM2.5 million being the cost of replacement of air conditioners and lost production time has been lodged with the Company by MML. The management is of the view that the claim is not justified, as the air conditioners were properly functioning and had been tested for quality and that the defects have arisen because of the negligence of MML and its technicians. However, a provision of RM0.5 million has been made in the financial statements in this respect.

(ii) Depreciation on certain equipment has been charged at 10% per annum on reducing balance method. This rate is consistent with prior years and the same rate is being used by most other companies, in the automobile industry. However, significant losses have recently been recorded on the disposal of similar equipment. Management has provided written representations in respect of the above matters.

Required:

Question 1 : Describe the audit evidence you should gather to address the above issues.