Question

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.

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

Answer 1

Solution

substantive procedure is a process, step, or test that creates conclusive evidence regarding the completeness, existence, disclosure, rights, or valuation (the five audit assertions) of assets and/or accounts on the financial statements.

FIVE substantive audit procedures that the auditors of TNH could undertake are as follows:

1) As, every business has their objective to flourish their business, Policy are in place, But same is not adhered, as Whole management is under a control a naïve person, without acknowledgement all decision are taken by her. It is apt that There is no proper governance over the business.

2)  Lack of Internal Control is clearly visible as no control over the quality check over the receipt of goods, Outward movement. Suppliers invoice, Items recived as per specifications shall be taken care off.

3) No Proper place or Resolution is passsed for utilisation of funds ( Overdraft) for Purchase of Goods which the management is not aware of the same or such decision. Minutes shall be documented.

4) Policy in Place for Making purchases, No Tender has been issued by the parties and not considered other option and not passed any Resolution records for taking any decision

5) Payment Authorisation. Mark up Decsion over sale.