Question Tag: Warranty provision

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  • 20 Marks

FR – Nov 2017 – L2 – Q3 – Financial Statements Correction

Adjust the draft statement of financial position and profit figures for Okushe Ltd considering the necessary corrections and revaluations.

Okushe Ltd is a listed textile manufacturing company that prepared the following draft statement of financial position as at 31 October 2017. On subsequent examination of the books and records, the Finance Director prepared a list of issues that may require amendments to the draft statement presented.

Okushe Ltd Statement of Financial Position as at 31 October 2017

GH¢000
Non-current assets
Property, Plant & Equipment 1,020,000
Intangible assets 100,000
Equity investments 360,000
Total non-current assets 1,480,000
Current assets
Inventory 65,000
Trade receivables 130,000
Cash & bank 30,000
Total current assets 225,000
Total assets 1,705,000
Equity
Equity share capital 580,000
Retained Earnings:
– Balance 1 November 2016 375,000
– Profit for year 95,000
– Dividend declared (30,000)
Total Retained Earnings 440,000
Other components of equity:
– Balance 1 November 2016 128,000
– Other comprehensive income for the year 35,000
Total other components of equity 163,000
Total equity 1,183,000
Non-current liabilities
Finance lease obligations 175,000
5% debenture 2021 150,000
Total non-current liabilities 325,000
Current liabilities
Trade payables 95,000
Finance lease obligations 35,000
Provision for warranty claim 12,000
Corporation tax due 25,000
Final dividend due 30,000
Total current liabilities 197,000
Total equity & liabilities 1,705,000

The following notes are relevant:

  1. Property, Plant and Equipment (PPE):
    • The property carried at GH¢130 million was revalued to GH¢110 million on 31 October 2017. This revaluation has not been accounted for. The revaluation reserve (included in other components of equity) had a balance of GH¢12 million due to previous revaluations of this property.
    • A sale agreement was entered during October 2017 to sell some plant with a carrying value of GH¢45 million for an agreed price of GH¢39 million. No cash has been received, as a 30-day credit period was agreed with the purchaser. No entry has been made for this transaction.
  2. Equity Investments:
    • The fair value of equity investments as at 31 October 2017 was GH¢380 million, which has not yet been incorporated into the financial statements. Okushe has decided to take all fair value gains and losses on equity investments to “other comprehensive income” as permitted by IFRS 9 – Financial Instruments.
  3. 5% Debenture:
    • The 5% debenture was issued on 1 November 2016 for cash proceeds of GH¢150 million and was correctly recorded. The effective rate of interest to maturity was 6.5%. The only other entry made in respect of the debenture was the payment of GH¢7.5 million interest on 31 October 2017.
  4. Warranty Provision:
    • The company offers a 12-month warranty on all goods sold. A provision is maintained for the expected cost of honoring this warranty, which has not been updated as at 31 October 2017. 40,000 units of its product were sold during the year, all qualifying for warranty. It expects 10% will need minor repairs at an average cost of GH¢500 each, and 3% will need major repairs at a cost of GH¢10,000 each.

Required:

a) Prepare a schedule showing any corrections required to the profit and other comprehensive income for the year. (8 marks)

b) Redraft the Statement of Financial Position at 31 October 2017, considering the above adjustments. (12 marks)

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  • 3 Marks

AAA – Nov 2020 – L3 – Q2b – Audit Evidence | Evaluation and Review

Explain significant audit procedures to be performed in the final audit regarding the warranty provision as at 31 March 2019

Explain the significant audit procedures to be performed during the final audit in respect of the estimated warranty provision in the statement of financial position of Manuf Co. as at 31 March 2019. (3 marks)

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  • 20 Marks

AAA – May 2021 – L3 – Q2 – Audit evidence | Evaluation and review

Recommend audit procedures for validating accounting estimates, evaluate the appropriateness of written representations, and assess the impact of management's refusal to provide representations on the audit report.

Oliso Private Company Ltd has been operating in the manufacturing sector for over a decade. One of its major products is manufacturing equipment, which can reduce toxic emissions in the production of chemicals. The company recently employed a new marketing manager who introduced a series of marketing initiatives. This has resulted in significant growth of the company since the appointment of the marketing manager. One of the initiatives is the warranties that the company gives to its customers. The company guarantees its products for three years, and if problems arise within the period, it undertakes to fix them or provide a replacement for the product.

You are the Senior Manager recently engaged by Integrity Audit Consult responsible for Oliso Private Company Ltd’s audit. You are performing the final review as required by ISA 520 Analytical procedures for the audit and have come across the following issues.

Receivable balance due from Obey Company Ltd: Oliso Private Company Ltd has a material receivable balance due from a customer named Obey Company Ltd. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Obey Company Ltd for over eight months. Oliso Private Company Ltd however would not allow this balance to be included in the list of balances to be circulated. Instead, management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Warranty provision: The warranty provision included in the statement of financial position is material. The audit team has performed testing over the calculations and assumptions, which are consistent with prior years. The team has requested a written representation from management confirming the basis and amount of the provision. Management is yet to confirm acceptance of the need to issue this representation.

Required:

a) Recommend THREE (3) audit procedures to validate the accounting estimates. (5 marks)

b) For each of the two issues above:

i) Evaluate the appropriateness of written representations as a form of audit evidence. (4 marks)

ii) Describe TWO (2) additional procedures the auditor should perform to conclude on the balances to be included in the financial statements. (6 marks)

c) The directors of Oliso Private Company Ltd have decided not to provide the audit firm with the written representation for the warranty provision as they feel it is unnecessary.

Required:

Explain the steps the auditor of Oliso Private Company Ltd should take to assess the impact of management’s refusal to provide a written representation on the auditor’s report. (5 marks)

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  • 20 Marks

AAA – May 2020 – L3 – Q3 – Audit evidence, Evaluation and review

Discusses audit procedures for accounting estimates, the appropriateness of written representations, and additional audit procedures.

GGC Co. Ltd (GGCL) specializes in manufacturing equipment which can help to reduce toxic emissions in the production of chemicals. The company has grown rapidly over the past eight years, and this is partly due to the warranties that the company gives to its customers. It guarantees its products for five years, and if problems arise during this period, it undertakes to fix them or provide a replacement.

You are the manager responsible for the audit of GGCL, and you are performing the final review stage of the audit and have come across the following issues:

Receivable balance owing from Nhyira Co. Ltd
GGCL has a material receivable balance owed by its customer, Nhyira Co. Ltd. During the year-end audit, your team reviewed the aging of this balance and found that no payments had been received from Nhyira Co. Ltd for over six months. GGCL would not allow this balance to be circularized. Instead, management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Warranty provision
The warranty provision included within the statement of financial position is material. The audit team has performed testing over the calculations and assumptions which are consistent with prior years. The team has requested a written representation from management confirming that the basis and amount of the provision are reasonable. Management is yet to confirm acceptance of this representation.

Required:

  1. Describe the audit procedures required in respect of accounting estimates.
    (8 marks)
  2. For each of the two issues above:
    i) Discuss the appropriateness of written representations as a form of audit evidence; and
    (6 marks)
    ii) Describe additional procedures the auditor should now perform in order to reach a conclusion on the balance to be included in the financial statements.
    (6 marks)

(Total: 20 marks)

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  • 20 Marks

FR – Nov 2017 – L2 – Q3 – Financial Statements Correction

Adjust the draft statement of financial position and profit figures for Okushe Ltd considering the necessary corrections and revaluations.

Okushe Ltd is a listed textile manufacturing company that prepared the following draft statement of financial position as at 31 October 2017. On subsequent examination of the books and records, the Finance Director prepared a list of issues that may require amendments to the draft statement presented.

Okushe Ltd Statement of Financial Position as at 31 October 2017

GH¢000
Non-current assets
Property, Plant & Equipment 1,020,000
Intangible assets 100,000
Equity investments 360,000
Total non-current assets 1,480,000
Current assets
Inventory 65,000
Trade receivables 130,000
Cash & bank 30,000
Total current assets 225,000
Total assets 1,705,000
Equity
Equity share capital 580,000
Retained Earnings:
– Balance 1 November 2016 375,000
– Profit for year 95,000
– Dividend declared (30,000)
Total Retained Earnings 440,000
Other components of equity:
– Balance 1 November 2016 128,000
– Other comprehensive income for the year 35,000
Total other components of equity 163,000
Total equity 1,183,000
Non-current liabilities
Finance lease obligations 175,000
5% debenture 2021 150,000
Total non-current liabilities 325,000
Current liabilities
Trade payables 95,000
Finance lease obligations 35,000
Provision for warranty claim 12,000
Corporation tax due 25,000
Final dividend due 30,000
Total current liabilities 197,000
Total equity & liabilities 1,705,000

The following notes are relevant:

  1. Property, Plant and Equipment (PPE):
    • The property carried at GH¢130 million was revalued to GH¢110 million on 31 October 2017. This revaluation has not been accounted for. The revaluation reserve (included in other components of equity) had a balance of GH¢12 million due to previous revaluations of this property.
    • A sale agreement was entered during October 2017 to sell some plant with a carrying value of GH¢45 million for an agreed price of GH¢39 million. No cash has been received, as a 30-day credit period was agreed with the purchaser. No entry has been made for this transaction.
  2. Equity Investments:
    • The fair value of equity investments as at 31 October 2017 was GH¢380 million, which has not yet been incorporated into the financial statements. Okushe has decided to take all fair value gains and losses on equity investments to “other comprehensive income” as permitted by IFRS 9 – Financial Instruments.
  3. 5% Debenture:
    • The 5% debenture was issued on 1 November 2016 for cash proceeds of GH¢150 million and was correctly recorded. The effective rate of interest to maturity was 6.5%. The only other entry made in respect of the debenture was the payment of GH¢7.5 million interest on 31 October 2017.
  4. Warranty Provision:
    • The company offers a 12-month warranty on all goods sold. A provision is maintained for the expected cost of honoring this warranty, which has not been updated as at 31 October 2017. 40,000 units of its product were sold during the year, all qualifying for warranty. It expects 10% will need minor repairs at an average cost of GH¢500 each, and 3% will need major repairs at a cost of GH¢10,000 each.

Required:

a) Prepare a schedule showing any corrections required to the profit and other comprehensive income for the year. (8 marks)

b) Redraft the Statement of Financial Position at 31 October 2017, considering the above adjustments. (12 marks)

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  • 3 Marks

AAA – Nov 2020 – L3 – Q2b – Audit Evidence | Evaluation and Review

Explain significant audit procedures to be performed in the final audit regarding the warranty provision as at 31 March 2019

Explain the significant audit procedures to be performed during the final audit in respect of the estimated warranty provision in the statement of financial position of Manuf Co. as at 31 March 2019. (3 marks)

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  • 20 Marks

AAA – May 2021 – L3 – Q2 – Audit evidence | Evaluation and review

Recommend audit procedures for validating accounting estimates, evaluate the appropriateness of written representations, and assess the impact of management's refusal to provide representations on the audit report.

Oliso Private Company Ltd has been operating in the manufacturing sector for over a decade. One of its major products is manufacturing equipment, which can reduce toxic emissions in the production of chemicals. The company recently employed a new marketing manager who introduced a series of marketing initiatives. This has resulted in significant growth of the company since the appointment of the marketing manager. One of the initiatives is the warranties that the company gives to its customers. The company guarantees its products for three years, and if problems arise within the period, it undertakes to fix them or provide a replacement for the product.

You are the Senior Manager recently engaged by Integrity Audit Consult responsible for Oliso Private Company Ltd’s audit. You are performing the final review as required by ISA 520 Analytical procedures for the audit and have come across the following issues.

Receivable balance due from Obey Company Ltd: Oliso Private Company Ltd has a material receivable balance due from a customer named Obey Company Ltd. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Obey Company Ltd for over eight months. Oliso Private Company Ltd however would not allow this balance to be included in the list of balances to be circulated. Instead, management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Warranty provision: The warranty provision included in the statement of financial position is material. The audit team has performed testing over the calculations and assumptions, which are consistent with prior years. The team has requested a written representation from management confirming the basis and amount of the provision. Management is yet to confirm acceptance of the need to issue this representation.

Required:

a) Recommend THREE (3) audit procedures to validate the accounting estimates. (5 marks)

b) For each of the two issues above:

i) Evaluate the appropriateness of written representations as a form of audit evidence. (4 marks)

ii) Describe TWO (2) additional procedures the auditor should perform to conclude on the balances to be included in the financial statements. (6 marks)

c) The directors of Oliso Private Company Ltd have decided not to provide the audit firm with the written representation for the warranty provision as they feel it is unnecessary.

Required:

Explain the steps the auditor of Oliso Private Company Ltd should take to assess the impact of management’s refusal to provide a written representation on the auditor’s report. (5 marks)

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  • 20 Marks

AAA – May 2020 – L3 – Q3 – Audit evidence, Evaluation and review

Discusses audit procedures for accounting estimates, the appropriateness of written representations, and additional audit procedures.

GGC Co. Ltd (GGCL) specializes in manufacturing equipment which can help to reduce toxic emissions in the production of chemicals. The company has grown rapidly over the past eight years, and this is partly due to the warranties that the company gives to its customers. It guarantees its products for five years, and if problems arise during this period, it undertakes to fix them or provide a replacement.

You are the manager responsible for the audit of GGCL, and you are performing the final review stage of the audit and have come across the following issues:

Receivable balance owing from Nhyira Co. Ltd
GGCL has a material receivable balance owed by its customer, Nhyira Co. Ltd. During the year-end audit, your team reviewed the aging of this balance and found that no payments had been received from Nhyira Co. Ltd for over six months. GGCL would not allow this balance to be circularized. Instead, management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Warranty provision
The warranty provision included within the statement of financial position is material. The audit team has performed testing over the calculations and assumptions which are consistent with prior years. The team has requested a written representation from management confirming that the basis and amount of the provision are reasonable. Management is yet to confirm acceptance of this representation.

Required:

  1. Describe the audit procedures required in respect of accounting estimates.
    (8 marks)
  2. For each of the two issues above:
    i) Discuss the appropriateness of written representations as a form of audit evidence; and
    (6 marks)
    ii) Describe additional procedures the auditor should now perform in order to reach a conclusion on the balance to be included in the financial statements.
    (6 marks)

(Total: 20 marks)

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