Tag (SQ): Financial Statements

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  • 10 Marks

FA – L1 – Q25 – Non-current assets and depreciation

Adjust plant and equipment and accumulated depreciation accounts for Akosua Pharmaceuticals Limited for errors in 20X9 financial statements.

The draft statement of financial position of Akosua Pharmaceuticals Limited as on December 31, 20X9, depicts the following:

Description GH¢
Plant and equipment – Cost 12,387,060
Less: Accumulated Depreciation (4,792,540)
7,594,520

On reviewing the accounts of the business, its auditor found that the records have been correctly maintained except for the following events:
(i) On January 17, 20X9, a contract was signed for the purchase of a packaging machine from Kofi Enterprises Limited for GH¢1,125,000 which is to be delivered on July 17, 20Y0. The company paid an advance of GH¢450,000 on the signing of the contract and the balance was to be paid on delivery of the machine. The advance was debited to the plant and equipment account.
(ii) Installation of a production machine was completed on January 21, 20X9. The cost of the machine of GH¢2,700,000 was debited to the plant and equipment account. The cost of installation amounting to GH¢300,000 had been debited to a repairs account.

Depreciation is charged on a reducing balance method at 10% per annum. Depreciation on new assets commences in the month in which the asset is acquired.
The depreciation expense for the year 20X9 have been correctly calculated and recorded except for the impact of errors discussed above.

Required
Determine the correct balances as at December 31, 20X9 by recording appropriate adjustments in the following accounts:
(a) Plant and equipment
(b) Accumulated depreciation – plant and equipment

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  • 10 Marks

FA – L1 – Q13 – Preparing financial statements of a sole trader

Prepare a statement of profit or loss and financial position for Worthe's business for the year ended 30 June 20X9 using the given trial balance and inventory data.

The following is a trial balance for Worthe after his first year’s trading. You are required to prepare a statement of profit or loss for the year ended 30 June 20X9 and a statement of financial position as at that date.

Worthe – Trial balance as at 30 June 20X9

DR GH₵(000) CR GH₵(000)
Sales 28,794
Purchases 23,803
Rent 854
Lighting and heating expenses 422
Salaries and wages 3,164
Insurance 105
Land and buildings 50,000
Fixtures and fittings 1,000
Receivables 3,166
Sundry expenses 506
Payables 1,206
Cash at bank 3,847
Drawings 2,400
Motor vans 5,500
Motor running expenses 1,133
Capital 65,900
Total 95,900 95,900

Inventory at 30 June 20X9 was GH₵4,166,000.

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  • 20 Marks

MA – L2 – Q8 – Total Quality Management

Calculate production units, material purchases, machine hours, and profit/loss before and after TQM for Akwasi Company.

Akwasi Company makes and sells a single product from its base in Kumasi. The existing product specifications are as follows:

| Material X | 8 square metres at GH₵4 per square metre | | Machine time | 0.6 running hours | | Other machine costs | GH₵40/hour | | Selling price | GH₵100 |

Akwasi Company needs to fulfil orders for 5,000 units per period. There will be no change in inventory level during the period.
The following information is available about performance before the introduction of a TQM programme:
(1) 5% of incoming material from suppliers is scrapped due to poor receipt and storage.
(2) 4% of material input to the machine process is wasted in process.
(3) Inspection and storage of material cost GH₵0.10 per metre.
(4) Inspection during the cycle costs GH₵25,000 per period.
(5) Production is increased to allow for the downgrading of 12.5% of units at the final inspection phase. Downgraded units are sold as ‘second quality’ units at a discount of 30% of the final selling price.
(6) Production is increased to allow for returns from customers. These are replaced free of charge. Returns are due to specification failure and account for 5% of units initially delivered to customers. Replacement units incur a delivery cost of GH₵8 per unit. 80% of the returns from customers are rectified using 0.2 hours of machine running time and are resold as ‘third quality’ products at a discount of 50% on the standard selling price. The remaining returned units are sold as scrap for GH₵5 per unit.
(7) Product liability claims are estimated at 3% of sales revenue from standard product sales.
(8) Machine idle time is 20% of gross machine hours used.
(9) Sundry costs of administration, selling and distribution total GH₵60,000 per period.
(10) Akwasi Company is aware of these excess costs and currently spends GH₵20,000 per period to prevent them from happening.

Akwasi Company is planning a quality management programme that will increase its cost prevention expenditure from GH₵20,000 to GH₵60,000 per period. The estimates of performance levels after the TQM programme are as follows:
(1) A reduction in stores losses of material to 3%.
(2) A reduction in the downgrading of products inspected to 7.5%.
(3) A reduction in material losses in the process to 2.5% of input to the machine process.
(4) A reduction in returns of products from customers to 2.5% delivered.
(5) A reduction in machine idle time to 12.5% of gross hours used.
(6) A reduction in product liability claims to 1% of sales revenue.
(7) A reduction in inspection checks by 40% of the existing figure.
(8) A reduction in sundry administration, selling and distribution costs by 10% of the existing figure.
(9) A reduction in machine running time per unit of product to 0.5 hours.

Required:
(a) Prepare summaries showing total units, purchases of material and gross machine hours:
(i) before implementation of the TQM programme, and
(ii) after implementation of the TQM programme.
(b) Prepare statements of profit or loss for the period both before and after implementation of the TQM programme.

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  • 6 Marks

FA – L1 – Q9 – Preparing financial statements of a sole trader

Prepare profit or loss statement and financial position for Kwame's business for the year ended 31 December.

The following information is available for Kwame’s business for the year ended 31 December. He started his business on 1 January.

GH¢’000
Trade payables 1,206
Trade receivables 3,166
Purchases 23,803
Revenue 28,794
Motor van 5,500
Drawings 2,400
Insurance 105
General expenses 506
Rent and rates 854
Salaries 3,164
Inventory at 31 December 4,166
Sales returns 50
Cash at bank 3,847
Cash in hand 100
Capital introduced 65,900

Required:
Prepare a statement of profit or loss for the year ended 31 December and a statement of financial position at that date.

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  • 20 Marks

AA – L2 – Q72 – Inventory Valuation

Discuss amendment need for inventory valuation and impact on auditor's report if unresolved for Mega Construct.

Mega Construct is a listed construction company with an annual revenue of GH₵350m. Mega Construct’s draft statement of profit or loss shows a profit before tax for the year ended December 31, 2008 of GH₵40m.
Mega Construct’s audit firm is conducting an audit. This is the first audit of Mega Construct that this audit firm has conducted. An enquiry to the previous audit firm revealed no reasons for concern. On completing audit work at the company’s premises, the audit senior drafts a memo, extracts from which are reproduced below:

(a) Inventory valuation
Inventories include GH₵7m, at cost, for scrap rubber from used car tyres. This material is widely used as a road surface in other countries. Contracts for road building with this country’s National Road Authority, the state authority for road construction, do not currently permit the use of this material. However, the matter was known to be under review and on being offered a special purchase of this material, Mega Construct speculated on a favourable outcome of this review and purchased the material. In February 2009, shortly before the financial statements were approved by the directors, the National Road Authority reported that it would not, currently, accept the use of this material. If used on non-National Road Authority contracts the material’s net realisable value would not exceed GH₵2m.
The finance director maintains that the issue of the National Road Authority report was a non-adjusting event after the reporting period. The write down of the inventory should, therefore, be reflected in the next period’s financial statements.

Required:
Discuss whether the financial statements require amendment and describe the impact on the auditor’s report if the issue remains unresolved.

(b) Depreciation
During the year ended December 31, 2005 the company purchased two computer controlled earth movers at a cost of GH₵2,500,000 each and a further two at the same price during the year ended December 31, 2006. Depreciation has been provided at 10% straight line, the same basis as it previously depreciated conventional earth movers. This year, 2008, the company has decided that improvements in technology made it worthwhile scrapping their first two computer controlled earth movers and replacing them with the latest model at a cost of GH₵6,000,000 each. The company provides a full year’s depreciation charge in the year of acquisition and none in the year of disposal.
The company’s chief engineer tells you that technology is developing so rapidly it appears likely they will continue to replace these machines every five years. In spite of this the finance director claims that the depreciation rate of 10% is in line with the industry standard and reflects the physical life of the machines. He urges that continued improvements in technology cannot be foreseen and that there is no justification for increasing depreciation to 20% because of the possibility of technological obsolescence.

Required:
Discuss whether the financial statements require amendment and describe the impact on the auditor’s report if the issue remains unresolved.

(c) Contingent liability
The company is being sued for GH₵50m by the National Road Authority for defective work on a recently completed road. The company maintains that it met the National Road Authority’s specification and it is the Authority’s engineers who are at fault in drawing up the specification. Mega Construct maintains that it has no case to answer, that the possibility of loss is remote and that the claim need not be disclosed as a contingent liability. An investigative journalist has recently published an article suggesting that other roads constructed by the company exhibit similar faults. The managing director has admitted that the company’s road building techniques are under investigation by the National Road Authority. If the company were to lose the case its future going concern would be threatened. No disclosure has been made in the financial statements.

Required:
For the following issue, discuss whether the financial statements require amendment and describe the impact on the auditor’s report if the issue remains unresolved.

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  • 15 Marks

AAA – L3 – Q67 – Environmental Issues

Discuss the impact of environmental issues on companies and their financial statements, and the auditor's role in addressing these.

In recent years, many commentators have been placing increasing emphasis on the importance of the environment. Perhaps as a consequence of this, companies have begun to recognise their environmental responsibilities and environmental issues now often have important implications for companies. Such implications cannot be ignored by company auditors. The profession needs to show an awareness of the possible impact of environmental issues on clients’ financial statements.

Required

Discuss.

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  • 10 Marks

AAA – L3 – Q66 – Reporting

Define and explain the use of Emphasis of Matter and Other Matter paragraphs in an auditor's report for Kweku Medical Co.

You are the partner responsible for the audit of Kweku Medical Co, for the year ended 30th April 2014. The final audit has been completed and you have asked the audit manager to draft the auditor’s report. The manager is aware that there is guidance for auditors relating to the auditor’s report in ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report. The manager has asked for your assistance in this matter.

Required:
(i) Define an “Emphasis of Matter paragraph” and explain, providing examples, the use of such a paragraph.
(ii) Define an “Other Matter paragraph” and explain, providing examples, the use of such a paragraph.

Note: You are not required to produce draft paragraphs.

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  • 10 Marks

AAA – L3 – Q65 – Reporting

Prepare a management report on payroll internal control deficiencies at Bibini Co. Ltd., including implications and recommendations.

Kofi & Co. have audited the annual financial statements of Akoma Co. Ltd., a public limited liability company, for the year ended 31st December 2014. The accounting system of the company is partially computerised.
During the audit, it was detected that just two members of staff, out of one hundred and fifty workers, were entirely and equally responsible for the maintenance of personnel records and preparation of the payroll. The chief accountant only confirms that the amount of the wages and salaries cheque agrees with the total of the net wages column in the payroll, then he signs without any reasonableness check of the amount of the total wages cheque. This situation is a serious deficiency in the system of internal control which can have serious implications. As audit senior, you are considering communicating this situation to the management, showing the deficiency, implications, and recommendations.

Required:
Prepare an appropriate report to management on the deficiency noted in the system of internal control for payroll.

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  • 8 Marks

AAA – L3 – Q64 – Subsequent events

Identify four financial statement areas relevant to subsequent events review, with relevant post-year-end information and reasons.

Identify four areas of the financial statements to which a review of subsequent events might be relevant. For each area state what kind of information available after the reporting period might be relevant, and why.

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  • 15 Marks

AAA – L3 – Q63 – Audit-related services

Assess audit procedures and alternative audit opinions for Maris Vintages' going concern status due to loan repayment issues.

You are the audit manager in charge of the audit of Maris Vintages, a company which imports and distributes palm wine. In recent years the company has become less profitable due to the large range of palm wines now carried by supermarkets. The draft financial statements for the year ended 30 November 20X8 show that current liabilities exceed current assets by $200,000.
The company’s major source of finance is a bank loan of $500,000 which is due for repayment in full on 31 October 20X5. The company is currently negotiating with its bankers for a replacement long-term loan of $1 million. They intend to use some of the loan to reposition themselves in the marketplace to establish the superiority of their wines over those sold in supermarkets.
The directors submitted a profit forecast with their loan application and are optimistic that their application will be successful. However, they do not expect negotiations to be completed before the annual general meeting in March. Your firm has been asked not to approach the bank directly.

Required
(a) Set out the audit procedures you would perform in order to establish the ability of Maris Vintages to continue as a going concern.
(b) Discuss the alternative audit opinions that might be relevant to the financial statements of Maris Vintages together with the circumstances in which each would be appropriate.

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