Question

In: Accounting

Top Notch Homes Ltd. (TNH) is a privately owned company selling a luxury range of home...

Top Notch Homes Ltd. (TNH) is a privately owned company selling a luxury range of home equipment. Fiona Fielding, the daughter of the company’s founder, took over responsibility for running the company in December 2018. She has little management experience. Her main interest is in developing a new business line to broaden the company’s activities. She has no interest in day-to-day internal control activities preferring instead to adopt a more informal management style.
Fiona found a supplier of a new design of hot tub in Norway. She immediately started to import these hot tubs financed by a substantial bank overdraft. The company sells to retailers at £2,000 per unit representing a typical mark-up of 100% on cost. At first sales averaged 50 units per month. Demand was so great that Fiona was forced to engage a second supplier in Finland but at a purchase cost of £1,500 per unit. That supplier required Fiona to sign a three-year contract committing to purchase 400 units per annum.
In the last two months of the accounting period ended 31 December 2019, sales of the hot tubs have fallen significantly and the selling price has had to be reduced by 30%. The hot tubs are sold with a three-year warranty. Some of the units bought from Finland have developed faults which cannot be rectified on site. Customers have insisted that the faulty units be replaced or a complete refund given. Fiona is reluctant to tell the auditors exactly how many units have had to be replaced. At the year-end, inventory consisted of 200 saunas. Fiona is adamant that these should be valued at cost.
Payments due to the suppliers have been delayed because there have been problems reconciling the invoices payable to suppliers with the deliveries received from them. The supplier in Norway is threatening legal action to enforce payment and the supplier in Finland is insisting on cash upfront before any more deliveries are made.


REQUIRED:
1. Identify EIGHT specific factors that should concern the auditors and explain why each factor is of concern?

2. Outline FIVE substantive audit procedures that the auditors of TNH could undertake and explain the purpose of each.

Solutions

Expert Solution

1.

The factors that need to be looked into:

The daughter of the founder took over the company who is incompetent and also not interested in day to day matters. As the top management has the ultimate responsibility to look over the functioning of the operations and the fairness in the operations , it is important to check the competence of the same .

The new hot tub was new in the market , yet the company was able to sell those at a typical mark up of 100% . Usually , new products require promotion and pursuance to the customers. Yet the demand was also hugh and also the markup.

The status of the substantial overdraft taken by the company. Since , to finance the imports the amount must be very high ,, also overdraft has a low maturity period.

The contract entered with the second supplier. Because the contract was for a long term, also for a substantial number of units. And also the unit cost was higher by 50%.

The fall in demand and its impact on the operations of the company. Since the product was earning good profit and the company had incurred huge liablities for the same, the decrease in demand can have large impact on the stakeholders of the company.

The company entered into a 3 year contract with Florida's supplier and the units received from them were defective. Also Fiona was reluctant to provide the number of units replaced. If the number of units not replaced or refunded is large, the customers can react adversely towards the company. And also the reputation of the company is at stake.

Inventory valuation should be done at cost at NRV , whichever is lower. In this situation it is apparent that the realisable value will be lower than the cost. For true presentation of the financial statements, inventory valuation should be done appropriately.

The company has due payment towards the suppliers . And also threats for legal action have been given. It should be checked whether the company will be able to pay the same. If not, the growth prospects and present position of the company will deteriorate and also the profits of the company will be adversely affected.

2. The first audit procedure to be taken by the auditor is to check the internal controls of the company. As Fiona is incompetent and also not interested in day to day affairs, the internal controls have to be checked to check it's reliability and also the competence and integrity of lower level managers.

Since Fiona is reluctant to provide number of units replaced , the auditor needs to check the number of units sold, the customers of the product and enquire from them about the same. The sales team can also be enquired about the problem face by the customers and what is done for the same .

The auditor has to check with the bank to know whether the overdraft has been paid or if not paid, what are the terms and conditions on which the overdraft is taken.

The auditor should collect information about the supplier from Florida. For this he can enquire other companies which import such tubs. And also check, if there is any connection with the company. This is because the 3 year contract shows nothing but losses.

The supplier has to be enquired to find out the due amount to them . Since they are threatening to take legal action


Related Solutions

Top Notch Homes Ltd. (TNH) is a privately owned company selling a luxury range of home...
Top Notch Homes Ltd. (TNH) is a privately owned company selling a luxury range of home equipment. Fiona Fielding, the daughter of the company’s founder, took over responsibility for running the company in December 2018. She has little management experience. Her main interest is in developing a new business line to broaden the company’s activities. She has no interest in day-to-day internal control activities preferring instead to adopt a more informal management style. Fiona found a supplier of a new...
Stark Security Company, a division of Stark Enterprises offers a range of top-notch security services for...
Stark Security Company, a division of Stark Enterprises offers a range of top-notch security services for athletes and entertainers. Each type of service is considered a separate department. Bruce Banner, who is the general manager at Stark Company, is compensated partly based on departmental performance by staying within the quarterly cost budgets. Banner proudly proclaims to you,“I will not go over budget even if it means compromising the level and quality of service. He explains that these are usually minor...
Claire Ltd is a company that specialises in selling high-end luxury designer apparel for women. May...
Claire Ltd is a company that specialises in selling high-end luxury designer apparel for women. May and June are two directors of the company. May has extensive knowledge about fashion as she has done a degree in fashion designing. June is specialist in the accounting side of the company as she has done a bachelor degree in Accounting. One day May has a fabulous idea to expand the company into the children’s apparel market. May wanted to make children’s clothes...
back to top Question 1 Our Earth Pty Ltd, an Australian owned company, are the manufacturers...
back to top Question 1 Our Earth Pty Ltd, an Australian owned company, are the manufacturers of a specially designed bio-degradable, disposable coffee cup made from sustainable materials.  They are currently the sole supplier to coffee shops in Australia.  During the year Our Earth Pty Ltd discovered that Coffee Bean Pty Ltd, the owner of a chain of coffee shops Australia wide, had been contracting an overseas company to manufacture a similar cup based on their design, for a cheaper...
Consider the following scenario: The privately owned Baker Company was founded in 1960. The company manufactures...
Consider the following scenario: The privately owned Baker Company was founded in 1960. The company manufactures kitchen cabinets and has been very successful, expanding from one facility to twelve facilities in the same and other states. All facilities but the original are located near interstate highways. The original facility, which is no longer the headquarters, is in a downtown area of a major city (which grew up around it) with relatively high real-estate taxes. It has had a negative contribution...
You are the HR Manager of a privately owned company. Your head office is in Ontario,...
You are the HR Manager of a privately owned company. Your head office is in Ontario, and you have satellite offices across the country. In total, the company employs approximately 3,000 workers (both hourly and salaried; all employees are non-union). Increased competition has forced you to reduce sales and income projections for the next year, and you have decided it will be necessary to reduce employment across the company by 10 percent. You intend to make an announcement about this...
            Kiko Ltd is a family owned Asian grocery business that specialises in selling a variety...
            Kiko Ltd is a family owned Asian grocery business that specialises in selling a variety of Japanese products. The company has recently started to receive orders from hotels across the state. It is now 1 October, and Mr Seike, the owner, is very pleased with his growing business. He compiled data on the business’ revenue and purchases for the past three months, and prepared forecasts for the upcoming three months as shown below: Sales Revenue Purchases Actual data: July...
Family Games, Inc., is a privately owned company with annual sales from a variety of wholesome...
Family Games, Inc., is a privately owned company with annual sales from a variety of wholesome electronic games that are designed for use by the entire family. The company sees itself as family-oriented and with a mission to serve the public. However, during the past two years, the company reported a net loss due to cost-cutting measures that were necessary to compete with overseas manufacturers and distributors. Yeah, I know all of the details weren’t completed until January 2, 2019,...
Store Closing? For this discussion, consider the following scenario: The privately owned Baker Company was founded...
Store Closing? For this discussion, consider the following scenario: The privately owned Baker Company was founded in 1960. The company manufactures kitchen cabinets and has been very successful, expanding from one facility to twelve facilities in the same and other states. All facilities but the original are located near interstate highways. The original facility, which is no longer the headquarters, is in a downtown area of a major city (which grew up around it) with relatively high real-estate taxes. It...
Ayayai Corporation is a privately owned company that uses ASPE. On January 1, 2020 Ayayai’s nancial...
Ayayai Corporation is a privately owned company that uses ASPE. On January 1, 2020 Ayayai’s nancial records indicated the following information related to the company’s dened benet pension plan: Dened Benet Obligation   $1,350,000 Pension Plan Assets   1,500,000 Ayayai Corporation’s actuary provided the following information on December 31, 2020: Current year service cost   $83,000 Prior service cost, granted Jan 1, 2020   170,000 Employer contributions for the year   83,000 Benets paid to retirees   25,000 Expected return on assets   5% Actual return on...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT