- 20 Marks
AAA – Mar 2025 – L3 – Q2 – Audit of Complex Transactions
Analyze financial statement extracts for audit risks in property, plant & equipment, trade receivables, and inventory, and outline audit evidence needed.
Question
Fadila Associates has been the auditors of Aduaba LTD for the past 3 years. Aduaba LTD is into the production of cashew drinks. You have been assigned to lead the audit of Aduaba LTD and have been provided with the following extracts from the draft financial statements for 2023 before the final audit planning meeting with the Chief Accountant.
Draft statement of financial position (extracts)
| Draft 2023 | Actual 2022 | |||
|---|---|---|---|---|
| GHc’000 | GHc’000 | GHc’000 | GHc’000 | |
| Property, Plant and Equipment | 42,860 | 41,620 | ||
| Receivables | ||||
| Trade | 4,800 | 3,150 | ||
| Other | 380 | 5,180 | 280 | 3,430 |
| Inventory | ||||
| Raw materials | 2,460 | 1,870 | ||
| Work-in-progress | 380 | 450 | ||
| Finished goods | 2,270 | 5,110 | 2,030 | 4,350 |
| Total Assets | 53,150 | 49,400 | ||
| Current liabilities | ||||
| Trade | 4,116 | 3,470 | ||
| Other | 870 | 4,986 | 650 | 4,120 |
Draft income statement (extracts)
| Draft 2023 | Actual 2022 | |
|---|---|---|
| GHc’000 | GHc’000 | |
| Revenue | 53,250 | 50,750 |
| Cost of sales | 39,360 | 39,220 |
| Gross profit | 13,890 | 11,530 |
| Depreciation of Property, Plant and Equipment | 4,450 | 2,810 |
| Other expenses | 3,540 | 3,480 |
| Profit before tax | 5,900 | 5,240 |
Your Audit Manager has reviewed these extracts and has identified three financial statement headings which he believes require further investigation. These are property, plant & equipment, trade receivables and inventory. He has also calculated the following accounting ratios:
| Draft 2023 | Actual 2022 | |
|---|---|---|
| Trade receivables collection period | 28 days | 17 days |
| Inventory turnover | 7.6 times | 8.9 times |
| Gross profit percentage | 26% | 23% |
Required: a) Explain why the Audit Manager has selected these three headings for further investigation from the given financial statement extract. (9 marks) b) Outline the audit evidence the Audit Manager should request for to clarify the situation regarding these financial statement headings. (11 marks)
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