Tag (SQ): Retail Industry

Christina retails women’s clothes through a chain of over 30 stores. Each of these stores is located in prime city-centre sites. The company is growing rapidly.

You are the audit manager in the firm that has recently been appointed as auditor to Christina. The audit partner has asked you to review a number of the company’s accounting policies and practices. These are set out below.

(1) The majority of the company’s sites are acquired on short leases (typically 10 to 25 years), with rent reviews usually every five years. A premium is usually paid to secure the lease, although this is normally associated with a period of reduced rent. Such premiums are capitalised and amortised over the life of the lease on a straight line basis.

(2) Before a new site can be opened for business it undergoes extensive refurbishment. During the refurbishment period, costs incurred (including rates and services as well as contractors’ fees) are debited to a holding account. On completion of the refurbishment, the costs are transferred to short leaseholds.

(3) Christina is very aware of the importance of image in the retail fashion industry. Following a survey by independent consultants, all the existing shops are to be restyled to project a new image. These costs will be capitalised.

Required

(a) Identify and comment on the accounting and auditing issues raised by the above.                                                                                    (b) List the further information that you require in order to be able to form an opinion on the above practices.