Quality control and auditing, Auditing

Research and development

Panorama Ltd manufactures and distributes a wide range of general pharmaceutical products. Selected audited data for the reporting period ended 31 December 2011 are as follows:

Gross profit $17,600,000

Profit before tax 1,700,000

Income tax expense 500,000

Profit for the period 1,200,000

Total assets:

Current 7,300,000

Non-current 11,500,000

The company uses a standard mark-up on cost.

From your audit files, you ascertain that total research and development expenditure for the year amounted to $4,700,000. This amount is substantially higher than in previous years and has eroded the profitability of the company. Mr Paniq, the company's finance director, has asked for your firm's advice on whether it is acceptable accounting practice for the company to carry forward any of this expenditure to a future accounting period.

Your audit files disclose that the main reason for the significant increase in research and development costs was the introduction of a planned 5-year laboratory program to attempt to find an antidote for the common cold. The following items were included in research and development costs for the year.

(a) Costs to test a new tamper-proof dispenser pack for the company's major selling line (20% of sales) of antibiotic capsules - $760,000. The new packs are to be introduced in the 2012 financial year.

(b) Experimental costs to convert a line of headache powders to liquid form - $590,000. The company hopes to phase out the powder form if the tests to convert to the stronger and better handling liquid form prove successful.

(c) Quality control required by stringent company policy and by law on all items of production for the year - $750,000.

(d) Costs of a time and motion study aimed at improving production efficiency by redesigning plant layout of existing equipment - $50,000.

(e) Construction and testing of a new prototype machine for producing hypodermic needles - $200,000. Testing has been successful to date and is nearing completion. Hypodermic needles accounted for 1% of the company's sales in the current year, but it is expected that the company's market share will increase following introduction of this new machine.

Posted Date: 2/18/2013 5:10:21 AM | Location : United States







Related Discussions:- Quality control and auditing, Assignment Help, Ask Question on Quality control and auditing, Get Answer, Expert's Help, Quality control and auditing Discussions

Write discussion on Quality control and auditing
Your posts are moderated
Related Questions
What is an audit, what financial records are available and what is their individual function in completing your audit? Audit is an independent examination of financial informat

Q. Which of the following represents the largest number of common shares? a. Treasury shares b. Issued shares c. Authorized shares d. Outstanding shares

Case Study: Hide-It (HI), a family-owned business based in Tombstone, Arizona builds custom homes with special features, such as hidden rooms and hidden wall safes. Hide-It has

Procedures in Evaluating the Work of Expert The auditor must get reasonable assurance which the expert's work constitutes suitable audit evidence in based of the financial inf

(a) In order to draw reasonable conclusions, an auditor is required to identify and use audit procedures to gather audit evidence. You are required to identify and explain, five

Experts as a source of Audit Evidence Mostly the auditor's work on evidence obtained from along within the entity supported through confirmations from third parties will provi

Sufficiency - Sources of evidence The audit evidence should in total enable the auditor to form an opinion on the financial statements.  Sufficiency is a measure of evidence o

B. For the one activity/process you ranked the most significant, identify and evaluate four risks. a. Two of the risk should be high to medium significance, and at least one shoul

State four factors considered determining sufficiency of audit evidence

Leasehold Property - Audit Process Exactly the same process is adopted for leasehold buildings and land as applied about freehold buildings and land except in the matter of de