Tag (SQ): Inventory

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  • 12 Marks

FA – L1 – Q11 – Preparing financial statements of a sole trader

Prepare statement of profit or loss and financial position for Blake's business for 20X9 using trial balance and inventory data.

Using the following information, prepare the statement of profit or loss for Blake for the year ended 31 December 20X9 and a statement of financial position as at that date.

Blake – Trial balance as at 31 December 20X9

Debit GH₵ Credit GH₵
Purchases 54,261
Sales 135,650
Sales returns 50
Purchase returns 61
Carriage inwards (delivery cost of purchases) 100
Carriage outwards (cost of deliveries to customers) 150
Inventory – 1 January 20X9 7,500
Wages and salaries 8,900
Rent 4,500
Telephone 560
Heat and lighting 890
Motor van running expenses 1,250
Bank interest 534
Land and buildings 60,000
Motor van 5,000
Payables 5,900
Bank overdraft 6,500
Receivables 8,700
Cash in hand 150
Drawings 15,000
Capital 19,434
Total 167,545 167,545

Inventory at 31 December 20X9 was GH₵9,500.

Required
Prepare the statement of profit or loss for the year ended 31 December 20X9 and a statement of financial position as at that date.

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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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  • 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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  • 10 Marks

AAA – L3 – Q56 – Reporting

Discuss materiality, true and fair concepts, and auditor's report effects for Gifty Goods and Cecilia's Contracts.

56 GG and CC

Described below are situations which have arisen in two unrelated audits and which are considered material.

(1) Gifty Goods

Although you are satisfied that closing inventories this year are fairly stated, the auditor’s report on the previous year’s financial statements was modified due to a restriction on the scope of the audit work in respect of the closing inventory figure. This led to a qualified opinion.

(2) Cecilia’s Contracts

The financial statements disclose the fact that a provision may be required to reduce inventories to their net realisable value if a contract with a major customer, representing 60% of the company’s revenue, is not renewed. A decision on this by the customer is not expected until after the financial statements are due to be signed.

Required

(a) State what is meant by, and explain the relationship between, the concepts of materiality and true and fair.

(b) State, with reasons, the effect on the auditor’s reports of the situations described above.

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  • 10 Marks

AAA – L3 – Q55 – Reporting

Draft a management report addressing internal control deficiencies in inventory and credit management at Richmond Computers.

55 Richmond Computers

Richmond Computers sells personal computers (PCs) to independent shops. You are the external auditor of Richmond Computers. Your interim audit revealed the following issues:

(1) The half year physical inventory count revealed that some PCs supposed to be in inventory were missing and that other machines which had been returned by customers were in inventory but had not been recorded as having been returned. A few of the missing PCs have been traced to directors who borrowed them for use at home.

(2) Two customers had been allowed to exceed their credit limits and new customers in the last year had not been allocated credit limits.

Required

Draft the section of your report to management dealing with the above deficiencies in internal control. Set out the deficiencies, their implications and your recommendations for improvement.

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  • 15 Marks

AAA – L3 – Q54 – Audit Reporting

Discuss modified audit opinions and outline the auditor's report for a material inventory issue at Eunice Pharmacies.

54 Eunice Pharmacies

During the course of your audit of Eunice Pharmacies for the year ended 30 April, you establish that the company did not carry out a year end physical inventory count at one of its retail branches and there are no alternative procedures that can be applied to confirm the quantities. The directors have estimated the branch inventory value.

At the conclusion of your audit you decide that the problem is material, but not pervasive, to the view given by the financial statements.

Required

(a) Explain the different types of modified audit opinions, giving an example of situations which may give rise to each type.

 

(b) Set out the main elements of the auditor’s report for the situation set out above.

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  • 20 Marks

AAA – L3 – Q37 – Evaluation and review

Review subsequent events at Benson Manufacturing for 30 June 20X8, including redundancy, receivables, legal claims, and inventory loss.

You are the manager in charge of the audit of Benson Manufacturing. Your subsequent events review for the year ended 30 June 20X8 has identified the following events, all of which took place after the date of the financial statements:
(1) A third of the sales force was made redundant. Provision has been made in the financial statements for the year ended 30 June 20X8 for redundancy payments of C500,000.
(2) One of Benson Manufacturing’s largest customers, Venture Retail, notified its intention to go into liquidation with an outstanding receivable of C250,000. The directors consider that the current general provision for irrecoverable receivables will cover any potential loss.
(3) A writ has been issued against the company by a former sales director who is claiming C120,000 for breach of his service agreement following his dismissal during the year ended 30 June 20X8. No provision has been made in the financial statements for the year ended 30 June 20X8 in respect of this claim.
(4) A fire at the company’s warehouse destroyed its entire inventory. The inventories had a book value of C2 million. This loss has not been included in the financial statements for the year ended 30 June 20X8.

Required
State the enquiries you would make and the evidence you would seek in order to reach a conclusion on the accounting treatment of the above in the financial statements for the year ended 30 June 20X8.

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  • 20 Marks

AA – L2 – Q38 – Audit Evidence

Explain why the audit manager selected PPE, trade receivables, and inventory for further investigation at Mellow Manufacturing. List further information needed from Mellow Manufacturing's financial controller to clarify PPE, receivables, and inventory issues.

Mellow Manufacturing is a long-established manufacturing company. The audit manager has been provided with the following extracts from the draft financial statements for £20X8 prior to the final audit planning meeting with the financial controller.

Draft statement of financial position (extracts)

Draft 20X8 £’000 Actual 20X7 £’000
Property, plant and equipment 32,560 31,850
Receivables
Trade 7,250 4,340
Other 1,230 1,150
Inventory
Raw materials 2,900 2,100
Work-in-progress 1,450 1,860
Finished goods 2,340 2,020
Current liabilities
Trade 4,320 4,180
Other 2,450 2,340

Draft statement of comprehensive income (extracts)

Draft 20X8 £’000 Actual 20X7 £’000
Revenue 43,150 40,680
Cost of sales (29,180) (28,890)
Gross profit 13,970 11,790
Distribution costs (3,450) (3,120)
Administrative expenses (2,340) (2,120)
Depreciation/loss on sale of PPE (2,280) (1,320)
Profit before tax 5,900 5,230

The manager has reviewed these extracts and has identified three financial statement headings which he believes require further investigation. These are property, plant and equipment, trade receivables, and inventory. He has also calculated the following accounting ratios:

Draft 20X8 Actual 20X7
Trade receivables collection period 30 days 19 days
Inventory turnover 8.6 times 9.9 times
Gross profit percentage 32% 29%

Required
(a) Explain why the manager has selected these three headings for further investigation.

(b) Set out the further information that the manager should request from the financial controller at the final audit planning meeting in order to clarify the situation with regards to these financial statement headings.

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  • 20 Marks

AAA – L3 – Q27 – Audit Evidence

Identify audit risks for Asante Motors, a multi-site car retailer with inventory and warranty issues.

Asante Motors (AM) sells motor vehicles and spare parts, and also provides servicing and repairs for vehicles. It operates from eight locations, having expanded recently from just four locations. Each location has a showroom for new and used automobiles, a store for spare parts and a service workshop.

Many of the second-hand vehicles sold by AM are vehicles that have been traded in by customers in part-exchange for a new or newer vehicle. Many used cars are sold for cash.

New cars are imported from a single supplier and are delivered on consignment. AM pays the agreed purchase price plus 2.5% interest four months after delivery. AM has a legal right to return unsold cars to the supplier, but in practice never does so.

New cars are sold with a two-year warranty from the supplier and used cars are sold by AM with a one-year guarantee. All repairs under warranty or guarantee are carried out by AM in its service workshops.

Each location carries a large amount of spare parts in its parts workshops. These operate under the brand name ‘StrongSpares’ and many parts are actually labelled with the StrongSpares brand name. A perpetual inventory system is used, and storekeepers continually check inventories of parts.

The car service workshops try to complete all jobs on the same day that they are started, and are successful in about 80% of cases. Jobs are usually invoiced immediately after completion, and are usually paid for by customers when they come to collect their vehicle.

The senior sales representative at each location is able to use a new car, selected from each consignment delivered from the supplier. These cars are used for business purposes and as demonstration models. They are eventually sold second-hand as ex-demonstration models.

AM purchased the StrongSpares brand name for its parts stores. Senior management believe that the cost of the brand name should not be amortised because they consider that the asset has an indefinite useful life.

AM has recently established an internal audit function, although this has not yet done much work.

Required
Using the information provided, identify and explain the audit risks that will have to be considered and dealt with when planning the final audit of Asante Motors for the financial year just ending.

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  • 20 Marks

AAA – L3 – Q26 – Audit Planning and Risk Analysis

Identify high-risk areas in the audit of Kumasi Playthings, a toy retailer with inventory and management issues.

Kumasi Playthings is a prestigious toy retailer trading from a single urban retail district. The accounts and administration offices are above the shop. The company is the wholly-owned subsidiary of a prominent retail group. Kumasi Playthings is headed by its dynamic managing director, Kofi Mensah, aged 70.

At Kofi Mensah’s insistence, your firm, as local to Kumasi Playthings, has recently been appointed as the auditor. Kumasi Playthings is now the only group company not to be audited by the group auditors.

The following matters have come to light during the preliminary discussions with Kofi Mensah and those members of his staff to whom he has allowed you access:

(1) The parent company wishes Kumasi Playthings to develop operations in a number of out-of-town shopping centres. Kofi Mensah regards this as unacceptable because it would destroy the goodwill and prestige built up over 150 years of quality retailing.

(2) The company has approximately 30,000 lines of inventory. Contrary to group accounting instructions, no physical count is planned for the year end. The company intends to rely on the continuous inventory system which commenced operation in March 20X8. Two major problems have occurred with the system to date. Firstly, a trainee failed to enter all the inventory lines before the system went live. Secondly, due to a dispute with the IT provider, there has been no maintenance service for five months.

(3) Kofi Mensah has just returned from a toy fair at which he placed an order for 50,000 dolls produced by a little-known youth cooperative led by his only niece. The chief buyer is said to be fuming over the incident.

(4) In the year to 31 January 20X8, Kofi Mensah received a bonus of C2m, but you were unable to obtain any information in respect of the calculation and authorization of the bonus. No other director of Kumasi Playthings received a bonus in that year and the next highest paid director received a total emoluments package of C300,000.

(5) There is a dispute with a major supplier over the credit facilities offered to Kumasi Playthings. The supplier manufactures and supplies 30% of Kumasi Playthings’ purchases and claims that Kumasi Playthings has continually exceeded its credit period and that its accounting staff are impatient and incompetent.

(6) The company’s overdraft limit of C2.5m is due for renegotiation in April 20X5.

Required
Identify the potentially high risk areas of the audit.

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