Problem for the auditor and the potential impact

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Reference no: EM13487741

Perfect Pies (PP)ltd makes pies, pastries and pizzas, which it sells to retailers under its own brand name and also supplies a major super market chain.  It has two sites: the bakery and its head office at Darlington, and a distribution depot in Wolverhampton.

PP's year end is 31 March 2012 and its accounts are required to be ready for publication by 31 May 2012.  It is now 8th May and the final audit work is due to be completed by 16th May.  The manager in charge of the audit is reviewing the audit file with a view to identifying any unresolved problems.

(You may assume an interim audit has been performed and that its results were satisfactory except for any deficiencies specifically mentioned in the case study.)

1.0       Summary of results

                                                                                    2012                            2011

                                                                                    £000                            £000

Turnover                                                                      3768                            3477

Gross Profit                                                                 1240                            1199

GP%                                                                            32.9%                           34.5%

Net Profit                                                                      308                               289

Corporation Tax                                                             62                                  57

Dividend                                                                       138                               120

Fixed Assets                                                               1940                            1745

Stock                                                                             140                              195

Debtors                                                                         712                              597

Bank balances                                                                 43                                51

Current Liabilities                                                       (433)                           (494)

 

Net Assets                                                                   2402                            2094

 

                                                                                    £000                            £000

Share Capital                                                               1840                            1840

Reserves                                                                        562                              254

 

Shareholders' funds                                                    2402                            2094

1.1       Stock summary

                                                                                    2012                            2011

                                                                                    £000                            £000

At Darlington 

Finished products                                                         43                                 61

Raw materials                                                               41                                 48

Packing materials                                                          38                                 47

At Wolverhampton:

Finished products                                                         18                                 39

Total                                                                            140                               195

Notes:

The following audit work has been carried out on the stock at Darlington:

- attended physical stocktake held on 31 March and performed test counts;

- ensured that material items of stock had been valued at the lower of cost and net realisable value;

- ensured that none of the stock on hand at 31 March was damaged or out of condition

The results of all tests were satisfactory.

Because of staff shortages, a physical count was not performed at Wolverhampton.  The stock figure was extracted from stock records maintained at the depot.  The audit team paid a one day visit to the Wolverhampton depot, in the course of which it performed the following audit work.:

-  agreed the stock balance in the accounts to the stock records.

-  discussed the year end stock figure with the depot manager and ascertained that he considered the figure to be reasonable and that his opinion year end stock did not require any provision for obsolete/damaged items.

1.2       Summary of debtors

                                                                                    2012                            2011

                                                                                    £000                            £000

Trade debtors                                                                535                              498

Loan to related company                                              120                                20

Prepayments                                                                    57                                79

 

Total                                                                            712                               597 

 

1.3       Summary of results of debtors' circularisation

Work done

A sample of 48 debtors was circularised.  This represented all balances over £10,000 at 31 March and a representative sample of 25 others.  A reminder letter was sent to all who had not replied by 23rd April.

 

Results

Results were as follows on the basis of replies received up to 8th May.

% of value

                                    Notes               £000                No.      of a/c's circularised

Agreed                                                              109                18                    30

Reconciled                      1                    140                14                    37

Disagreed                        2                      31                  1                      8

No reply                                                  95                15                   25

 

Total circularised                                 375                 48                    100

Notes:

1.Reconciling items were due to differences between the dates at which invoices and payments were entered in customers' and in PP's records.

2.The disagreement relates to an invoice for £3,000 sent to this customer in December 2011.  The customer is refusing to pay on the grounds that the goods were damaged in transit.  Note only the £3,000 is disputed the rest of the balance is accepted as valid.

1.4 Loan to associated company

Included in debtors is an unsecured loan made to Bartleby ltd, a private company that is a supplier of PP and in which PP is considering acquiring 20% of the share capital.  PP loaned Bartleby £20K in 2011 to provide working capital, and this amount has now been increased to £120K.  No repayments have been received.  The Finance director of PP was unwilling for the auditors to include this balance in the circularisation of debtors.  Accordingly audit work has been confined to the following:

- agreed balance outstanding to the nominal ledger;

- traced payment to cash book, bank statement and returned cheque and ensured the cheque payee is Bartleby;

- discussed the balance with Mrs Bateman, the finance director, who stated that in her opinion it is fully recoverable.

1.5 Fixed Assets

All figures £000

COST                                      1.4.07              Addns             Disposals         31.3.08

Freehold land & buildings         700                  400                  100                 1000

Plant                                        2200               1000                  900                 2300

Motor vehicles                           740                  700                  640                   800

Fixtures & fittings                      105                  200                      5                   300

Total                                        3745                2300                1645                 4400

 

DEPRECIATION                  1.4.07              Addns             Disposals         31.3.08

Freehold land & buildings         125                    20                     -                     145

Plant                                        1575                  850                  600                 1825

Motor vehicles                           250                  250                  135                   365

Fixtures & fittings                        50                    80                      5                   125

 

Total                                        2000                1200                   740                 2460

 

NET BOOK VALUE             1745                                                                  1940

Notes

1.Of the additions to land and buildings half (£200,000) is in fact the surplus arising on revaluation. This revaluation was carried out by one of the directors of PP who is a surveyor.

2.The figure for additions to plant has been overstated. A number of orders for items of plant not confirmed before the yearend have been accrued instead of being treated as capital commitments. As a result fixed assets and current liabilities have both been overstated by £75,000.

Assuming the results of the audit were satisfactory in all other areas:

You are required to act as the audit manager reviewing the working papers and

1. Identify the unresolved problems which need to be addressed and discuss why each is a problem for the auditor and the potential impact of each on the financial statements.

2.Suggest how each of the problems might be resolved by the audit team and/or PP's management in the time available.  The alternatives might include:

-altering the accounts;

-qualifying the audit report;

-obtaining management assurances in the letter of representation;

-performing additional audit work, etc

In each case you should be specific about the steps to be taken e.g. what further tests should be performed (if any), what audit qualification is needed (if any) etc.  You may make assumptions as necessary or suggest alternative actions depending on the outcome of further work or management reaction.  There is no definitive answer to question 2.

Reference no: EM13487741

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