Question 1:a) To explain the procedures you would perform to confirm that inventory, sales and purchases cut-off is accurate.Auditor can obtain evidence by one or more of the following procedures. The procedures which will be performing to confirm that inventory, sales and purchases cut-off is accurate are inspection, observation, inquiry, confirmation, re-calculation, re-performance and analytical procedures.• Inspection? Inspection is an audit procedure in view of the examination of records or archives, regardless of whether interior or outer, that could be held in different structures, for example, paper, electronic or comparable, or on the physical evaluation of an advantage.
? The inspections of records and reports gives audit prove whose unwavering quality relies upon their temperament and source. ? Inspecting certain reports may give direct audit confirmation of the presence of an advantage, for example a money related instrument like an offer or a security where the archive itself constitutes the asset. ? At a similar time the assessment of the record may not give confirm in regard of the statements of possession and valuation of the assets. ? Similarly the investigation of substantial resources may give solid review prove about their reality yet not about the element’s rights and commitments or the valuation of the assets. ? Inspection of tangible assets such as record in the accounting record affirms presence, yet does not really affirm rights and obligations or valuation. ? Inspection of documentation or records such as this is in regards to the examination of reports or records, both inner and outside, in paper, electronic or different structures.
? This procedure gives confirmation of differing dependability relying upon the nature, source and viability of controls over generation in the event that it is interior. Observation? Observation is rather an audit procedure that comprises of taking a gander at a procedure or strategy being performed by others with the goal that confirmation about the genuine execution is gotten. ? However observation provides evident that is restricted to the point in time when it happens and by the way that being observed may impact how the procedure or method is performed on such event. ? Examples of observation are the auditor’s participation at the stock tallying by the element’s staff and observing the execution of control exercises. ? The auditor can acquire prove by viewing a procedure and perceiving how it is completed and affirms the techniques being happen in. ? For example, post opening.• Inquiry? Inquiry is a kind of type of audit procedure that is utilized broadly amid the execution of a review notwithstanding other procedures. ? It comprises of looking for both financial and non-financial information of people inside or outside the substance.
? Inquiries are essential as they may give new data to the auditor or verifying review confirms or, in actuality, data that varies altogether from other data got by the auditor. This includes looking for data from customer staff or outside sources. ? Obtain prove by making inquiry. Does not give adequate review proof to distinguish a material misstatement at attestation level.• Confirmation? Confirmation procedures might be a critical wellspring of significant and audit evidence. ? External confirmation is audit evidence that is gotten as a direct composed reaction to the examiner from an outsider such as the confirming party in paper frame, electronic medium or other medium. ? External confirmations are typically utilized while confirming declarations identifying with account balances, similar to payables and receivables, however ought not be confined to such things as it were.
? The auditor may solicit affirmation from the terms of understandings and exchanges with outsiders, regardless of whether any progressions to existing assentation’s has happened or whether no extra conditions are connected to an assentation, maybe in a different archive. A particular sort of enquiry where the auditor looks for affirmation from a gathering outside the element. For example, it can be from a bank or client. For example, it can be from a bank or client. • Re-calculation? Recalculation is a procedure that comprises of checking the numerical precision of archives or records and that can be utilized to confirm the exactness of the chronicle of exchanges or of the use of bookkeeping arrangements, for instance by recalculating depreciation of tangible assets. ? Recalculation anyway does not give confirmation of the exactness of the evaluated rate of deterioration charged in connection to each class of benefits. ? The auditor will be cheeks the arithmetical exactness of reports or records and can be performed using IT.• Re-performance? Re-performance rather includes the free execution by the auditor of procedures or controls that were initially executed as a major aspect of the substance’s inside control.
? The auditor re-performs a check or control initially did by the customers or who as a feature of the substance’s inside control.• Analytical Procedures? Analytical procedures can or ought to be utilized at different phases of a audit engagement: at the hazard evaluation arrange, as substantive review techniques to confirm budgetary explanations attestations and towards the finish of the review to prove whether the money related proclamations are predictable with the reviewer’s comprehension of the element.? Analytical procedures include assessments of money related data through investigation of conceivable connections among both budgetary and non-monetary information. They additionally incorporate examination of vacillations and connections that are conflicting with other important data or that contrast from expected qualities by a noteworthy sum.
? At the assertion level, analytical procedures might be utilized as substantive methodology either all alone or in conjunction with trial of points of interest. ? Substantive analytical procedures are for the most part more material to expansive volumes of exchanges that have a tendency to be unsurprising after some time and for which there is a desire that the connections among information exist and will proceed without signs in actuality. ? Sometimes a straightforward model may work out as successful logical methods. For example if a substance has a steady number of workers at settled rates of pay amid a period, at that point the reviewer may appraise the aggregate finance costs for the period with an abnormal state of exactness, subsequently acquiring review prove for a critical thing in the records and decreasing the need to perform trial of subtle elements on the finance. ? In different cases analytical procedures may give less convincing confirmation, for example when net edge rates are ascertained and contrasted all together with affirm an income sum, that may regardless be applicable if utilized with other procedures? An example of effective combination of substantive analytical procedures and trial of points of interest could be in regard of the valuation statement for money due, where the examiner may perform analytical procedures on a matured rundown of account holders notwithstanding trial of detail on consequent money receipts to check collectability of the receivables.
? Evaluating and contrasting financial information made by an investigation of conceivable relationship among financial and non-financial data and investigation of recognized changes and connections conflicting with other data.b) Define in detail the basis for valuing inventory in accordance with International Financial Reporting Standards.• The objective of International Financial Reporting Standard? To prescribe the accounting treatment for inventories. An essential issue in accounting inventories is the measure of cost to be perceived as a benefit and conveyed forward until the point when the related incomes are perceived.
? Provides direction on the assurance of cost and its consequent acknowledgment as a cost, including any record to net feasible esteem. ? It additionally gives direction on the cost equations that are utilized to appoint expenses to inventories. ? To create, in the general population intrigue, a solitary arrangement of high caliber, reasonable, enforceable and universally acknowledged monetary detailing norms in light of obviously explained standards. ? These gauges ought to require high caliber, straightforward and practically identical data in money related proclamations and other budgetary answering to encourage speculators, different members on the planet’s capital markets and different clients of financial information make economic decisions. To advance the utilization and thorough use of those measures ? In satisfying the above targets, to assess, as suitable, the necessities of a scope of sizes and kinds of substances in differing financial settings. • In IAS2 Inventories contains the necessities on the best way to represent most sort of inventories. The standard expects inventories to be estimated the lower of the cost and the net realisable value (NRV) and outline accepted methods of determining cost, including specific identification, first-in first-out (FIFO), last-in first-out (LIFO) and weighted average cost.
• IAS 2 gives direction to deciding the cost of inventories and the ensuing acknowledgment of the cost as a cost, including any record to net feasible esteem. It likewise gives direction on the cost recipes that are utilized to allot expenses to inventories. Inventories are estimated at the lower of cost and net feasible esteem.
• Net realisable value is the assessed offering cost in the normal course of business less the evaluated expenses of fulfillment and the assessed costs important to make the deal. The cost of inventories incorporates all expenses of procurement, expenses of transformation, for example, coordinate work and creation overhead and different expenses brought about in conveying the inventories to their present area and condition.c) State the types of inventory which may be worth less than cost• Slow moving inventory• Obsolete or superseded inventory• Second inventory and items that have been damage• Inventory which is being or is soon likely to be, sold at reduced prices• Discontinued inventory linesd) Describe the investigations you will carry out to identify this inventory• Reconcile the inventory count to the general ledger? Because it is totally conceivable that somebody inaccurately checked the stock. Provided that this is true, have an alternate individual consider it again such since the main counter could commit a similar tallying errors a second time. ? Further, if the physical check gives off an impression of being altogether lower than the book adjust, it is very conceivable that there are more inventories in a second area – so glance around for a second reserve of stock. Relating is the in all probability purpose behind a difference, so think about this progression first. ? We need will follow the valuation ordered from the physical stock check to the organization’s general ledger, to confirm that the tallied adjust was conveyed forward into the organization’s bookkeeping records ? Compare the inventory counts in the organization’s records to the genuine sums on the distribution centres racks, make sense of why there are contrasts between the two sums, and make changes in accordance with the records to mirror this examination.
? Inventory reconciliation is a critical piece of cycle checking, since the stockroom staffs utilizes it to ceaselessly refresh the precision of its stock records. Stock record precision is expected to guarantee that substitution things are requested in an opportune way, that stock is appropriately esteemed, and that parts are accessible available to be purchased or generation when required. ? Ensure that the genuine and recorded inventory amounts are the same toward the finish of the year, so that there will be no issues when the stock is audited. • Test check? Occurrence, for example, to frame a feeling concerning whether exchanges and occasions that have been recorded have happened and relate to the element. ? Completeness, for example, to frame a feeling concerning whether all exchanges and occasions that ought to have been recorded have been recorded. ? Accuracy, for example, to frame a supposition with reference to whether sums and other information identifying with recorded exchanges and occasions have been recorded suitably. ? Cut-off, for example, to frame a supposition with reference to whether exchanges and occasions have been recorded in the right accounting time frame. ? Classification, for example, to shape a feeling in the matter of whether exchanges and occasions have been recorded in the correct records.
• Observation of the inventory? An inventory observation is the oversight of a client’s inventory counting process by an outside auditor. This oversight work includes a number of tasks, including the following:? Verifying that all inventory was counted? Testing a sample of the counts made by client employees? Reviewing the client’s counting policies and procedures? Reviewing the extended cost calculations made by employeese) Describe the audit work you will carrying out to determine the net realisable value ofthe inventory you have found from your investigations in part d).• Cost of inventories• Test check• Net realizable value of inventories• Investigations of the original sample• Ensure all the work is performedQuestion 2:a) List and briefly describe the audit tests you would carry out to verify trade receivables at the year end – you are not required to describe how would carry out a receivables’ circularization• A rundown of transactions of the month? A rundown of transactions for the month is to record the exchanges of receivables. All transactions are plainly recorded in the rundown of transactions for the months. ? For case, for a rundown of transactions for the month is put resources into the business, cost of products sold, purchases equipment, account receivables, account payables and others. ? Verification of the genuineness of trade receivables can be utilized as the cut-off.• An aged list of balance? The period of records receivable is a scope of reports used to monitor clients who have not paid their bills and to record credit reminders.
The againg report is additionally an apparatus to encourage clients to pay their obligations early and figure out which invoices are past due. ? A matured rundown of balances has recorded the receivables how much cash is possessed and to what extent the date of installment has passed will be recorded in detail. ? For illustration, if the installment term is 30 days, the date extend in the furthest left-most list be 30 days, and those more than 30 days won’t be set in the furthest left-most list.
The second rundown will be 31 to 60 days, and the third rundown will be 61 to 90 days to tweet. On the off chance that the 31-day old receipt shows up in the second show, it speaks to past due installmentsb) Explain the difference between positive and negative circularisation• A positive circularisation? Consists of letters sent to an example of exchange receivable clients who are requested to affirm, specifically to the reviewer, the precision (or something else) of the expressed adjust as appeared in the review customer organization’s exchange receivables record for the subject client. Where clients can’t help contradicting the expressed adjust they are solicited to express the nature from their disagreement. ? For instance, if an individual or business substance is chosen for a review by the Internal Revenue Service (IRS), the citizen must create records to insist the data recorded on the selected tax returns. ? This incorporates positive affirmation of all wellsprings of pay, check of pertinent findings taken, and confirmation of guaranteed additions or misfortunes. Even if the data required for the review matches what was accounted for, all confirmation must be submitted to fulfil the review necessities.
Auditor should perform follow up procedures if the indebted person does not answer. • A negative circularisation ? Consists of letters sent to an example of trade receivables customers, who are requested to respond directly to the auditor, just in the event that they can’t help contradicting the expressed adjust as appeared in the review customer’s exchange receivables record for the subject client. ? Negative circularisation is all the more usually utilized if the person’s or business’ records are for the most part thought to be exceedingly precise by nature, regularly in light of stringent interior necessities or business rehearses.
? Negative circularisation is more affordable than positive circularisation, in light of the fact that there will be no second affirmation ask for and no subsequent strategies. ? Negative circularisation is normal utilized for all intents and purposes for reviews of clinics, retail locations, banks, and different businesses in which the receivables are expected from the overall population. ? A negative circularisation is intended for use in circumstances where a customer organization’s interior controls are as of now thought to be very solid, with the goal that the affirmation procedure is utilized as an optional review strategy for the records under audit. c) Describe the audit work you would carry out on the following replies to a positive receivables’ circularisation:i. Balance agreed by receivables• If balance concurred by receivables so you don’t need to change or adjust it.
• Review cash receipts.ii. Balance not agreed by receivables• Let the client adjust their balance until the point when the adjust can be concurred with the client’s balance and afterward check if there is anything to change. • You can verify whether you have made any of these errors, for example, Just timing contrasts of mistakes or controls, which can be disregarded directly.
• Reconciling items.iii. Receivables does not reply to the circularisation• If you don’t get a reply the auditor has not possessed the capacity to affirm the presence of the debtor, you can just experience different projects. You can’t disregard the problem since you haven’t gotten a reply.
• For case, you can check marked purchase orders and check the money got from clients.• Obtain the confirmation• Investigate subsequent cash receiptsQuestion 3:From the scenario below identify features which might cause you to have doubt about Layer Max Co going concern status.The highlights which cause to have doubt about Layer Max co going concern status:• Fall in gross profit margin accomplished (w1) ? The gross profit margin in 2016 is 9.2%, it drops to 7.0% out of 2017. In 2017, there is the fall in revenue that is result in fall in gross profit margin. At the point when the expenses appear to be steady and expanding interest costs because of the bank credit and back rent will keep on being an issue in going concern.
The Layer Max Co. will hard to make profit in future.• Losses $249,000The organization has been recorded noteworthy misfortunes which are $249,000 in Draft 2017 contrast with Actual 2016. The noteworthy misfortunes caused by the loss of long-standing client. The organization will discover troublesome in make transactions with the bank. These noteworthy misfortunes may effect on bank overdraft. Subsequently, it might influence the organization to proceed with its tasks. • Increased receivable adjust and expanded in long stretches of receivable (w2)? There is an expanded in long stretches of receivable in 2017 which is 98.
9 days from 74.8 days in 2016. The expanded in long stretches of receivable may causes cash flows issue out organization such as the organization does not have enough cash to pay use. The expansion in average debt gathering period might be caused by hopeless receivable from the significant client lost in the year. Along these lines, the gone receivable may turn out to be bad debts written off. This would cause expanded misfortunes.• Decreases in current ratio or liquidity ratio (w3)? The liquidity proportion in 2016 is 1.
05; it drops to 0.88 out of 2017. This may causes issue in going concern status of Layer Max Co. Right now, the organization has expanded in long periods of receivable. There is plausibility the organization may require to make allowance for irrecoverable receivables. This may exacerbate the liquidation status of organization. The organization as of now has loan and finance lease commitments which plausible may not be met.
• Increased in Gearing ratio ( w4) ? The gearing ratio is 0.87 of every 2016; it expanded to 1.33 out of 2017. As a rule, the increments in equipping proportion are bad news to any organizations. This implies the organization resolve to intrigue which could influence the future benefits.
The organization may have issue in arranging new finance arrangement with lenders. • Increasing reliance on short term finance ? The organization has been expanding reliance on short term finance in 2017. This short term finance does not anchor the future in light of the fact that the organization experiencing numerous change such as the organization have exacerbating in liquidation ratio, implies it might have troublesome in payback to banks. This may cause an issue for bank overdraft office arrangements. • Loss of long-standing client to contender ? This may build the danger of not gave competitor irrecoverable receivables in the financial statement.
This is consequence of plausibility of increments in potential other client could go with the same pattern. Thusly, it influences the organization’s future prospects. • Loss of business clients ? The business clients are given customary salary to organization. The customary wage used to reimbursement responsibilities by organization. In the event that the loss of business clients may causes huge effect on reimbursement responsibilities of organization. These outcomes in issues in cash flow of organization.
• Draft financial statement (last alterations are extraordinary) ? The net asset position of organization could be intensified impressively, if non-current resources are composed down to written down to recoverable amount is composed down to net feasible esteem. Besides, the terrible obligations arrangements might be fundamental has said previously. The conclusion may important to incorporate excess arrangements. All these extra change impressively could build misfortunes in organization.
• Overdraft facility to be looked into 3 months after the year end? The three months’ time frame is presumably not sufficiently long to distinguish a genuine change in the organization’s fortunes. The vulnerability matters must be reports to banks. As evaluators, we would attempt to foresee the bank’s presumable response to money related proclamations would be a high hazard.
Workings: 1. Draft year 2017 Gross profit = Gross profit / sales = $768,000 / $10,971 × 100% = 7.0%Actual year 2016Gross profit = Gross profit / sales = $1,086,000 / $11,560,000 × 100% = 9.4%2. Draft year 2017 Days of Receivable = (Account receivable / Revenue) ×365 days = ($2,975,000 / $10,971,000) × 365 days = 98.
9 daysActual year 2016Days of Receivable = (Account receivable / Revenue) ×365 days = ($2,369,000/$11,560,000) ×365 days = 74.8 days3. Draft year 2017Liquidity ratio: Current Ratio = Current assets / current liabilities = $3,070,000 / $3,481,000 = 0.88Actual year 2016Liquidity ratio: Current Ratio = Current assets / current liabilities = $2,430,000 / $2,307,000 = 1.054. Draft year 2017Gearing ratio = Total debts / Total equity = $4,704,000 / $3,544,000 = 1.33Actual year 2016Gearing ratio = Total debts / Total equity = $3,307,000 / $3,793,000 = 0.87