- 10 Marks
AAA – May 2017 – L3 – Q5b – Audit evidence | Reporting
Discuss the audit considerations related to inventory valuation at lower of cost and net realizable value and the implications of a refund policy on the audit report.
Question
You are an audit senior in Patampa and Associates, and nearing the end of the audit of Duakor Ltd. for the year ended 30 June 2016. Duakor Ltd owns a chain of clothing stores and also has a manufacturing division where it makes its own label brand “Dumas.” Own label clothing represents 50% of the inventory and sales of Duakor Ltd. The financial statements show a profit before tax of GH¢14m (2015 GH¢6m) and a statement of financial position total of GH¢46m (2015 GH¢30m). The following points have arisen on the audit:
i) Duakor Ltd. values its inventory at the lower of cost and net realizable value. Cost is determined by deducting a suitable estimated profit margin from the selling price. Inventory in the statement of financial position as at 30 June 2016 was GH¢2,530,000.
ii) Duakor Ltd. has a refund policy which states that a customer who is not satisfied with their purchase may return their goods within 28 days of purchase and obtain an exchange or a cash refund. Experience has shown that exchanges and refunds are common, as Duakor Ltd’s shops do not provide fitting rooms, space being at a premium. Duakor Ltd. does not make any provision in the financial statements for refunds.
Required:
Comment on the matters you will consider in relation to the implications of the above points on the audit report of Duakor Ltd. (10 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Audit opinion, Audit report, IAS 2, Inventory Valuation, Refund Policy
- Level: Level 3
- Topic: Audit evidence, Reporting
- Series: MAY 2017