In this case practise question:
2 marks for each question;
All questions should be attempted;
Once an answer is selected, you cannot go back or correct it;
Correct answer and explanation will be shown after an answer is chosen.
Background information:
You are an audit manager, auditing the financial statements of NP Engineering Co, a listed company, for the year ended 30 April 20X7.
NP’s management has provided you with a schedule of the realisable values of the inventories. A full inventory count was carried out at 30 April 20X7.
Audit tests have confirmed that the inventory counts are accurate and there are no purchases or sales cut-off errors.
One of the company’s factories was closed on 30 April 20X7. The plant and equipment and inventories were to be sold. By the time the audit work commenced in June 20X7, most of the inventory had been sold.
You have instructed the audit junior to evaluate the valuation of the inventory related to the closing factory at the year end. The audit junior has sent you a list of planned audit procedures.
On 17 March 20X7, NP’s managing director was dismissed for gross misconduct. It was decided that the managing director’s salary should stop from that date, and that no redundancy or compensation payments should be made.
The managing director has claimed unfair dismissal and is taking legal action against the company to obtain compensation for loss of his employment. The managing director says he has a service contract with the company which would entitle him to two years’ salary at the date of dismissal. The directors believe that there is a 35% chance of the managing director succeeding in his claim.
The financial statements for the year ended 30 April 20X7 record the resignation of the director. However, they do not mention his dismissal and no provision for any damages has been included in the financial statements.
Note:
A. Statements on auditor’s attendance at the inventory count –
It is the auditor’s responsibility to organise the inventory count.
The auditor observes client staff to determine whether inventory count procedures are being followed.
The auditor reviews procedures for identifying damaged, obsolete and slow-moving inventory.
If the results of the auditors’ test counts are not satisfactory, the auditor should insist that the inventory is recounted.
B. Here are audit procedures in auditing the valuation assertion for NP’s inventory –
Agree the selling prices of inventory sold since the year-end to sales invoices and the cash book.
Assess the reasonableness of management’s point estimates of realisable value of inventory that has not yet been sold by reviewing sales before the year-end, comparing the values with inventory that has been sold since the year-end and considering offers made which have not yet been finalised.
For a sample of inventory sold just before and just after the year end, match dates of sales invoices/date posted to ledgers with date on related goods despatched notes.
For unsold inventory, assess reasonableness of provisions for selling expenses by comparison of selling expenses with inventory sold.
C. The dismissal of NP’s managing director has alerted you to the possibility that the company may not have complied with employment regulations. You therefore need to determine the impact that such non-compliance may have on the audit.