Question

In: Accounting

You are one of the members of the audit team of Computer express which is growing...

You are one of the members of the audit team of Computer express which is growing at a rapid rate despite being in the competitive industry. The following is part of the information obtained from a planning meeting which the audit manager had with Computer express management.   

2018                       2019

K’000                     K’000

Revenue                        438,616                 373,700

Gross margin                  0.83                        0.79

Expenses as a percentage of revenue:                   

Distribution costs                             0.05                        0.10

Administrative expenses 0.17                        0.13

Selling expenses 0.18                        0.25

Required:           

(a) Given the information above, prepare a list of questions you will ask and observations you will make about Computer express’s performance.

(b) Describe what further information and explanations you will ask for from Computer express management during the audit.

c) Describe the substantive test that you should perform to confirm the figures.

Solutions

Expert Solution

2018 2019
Revenue 438616 373700
COGS% 17% 21%
COGS 74565 78477
Gross Profit Margin% 83% 79%
Gross Profit 364051 295223
Distirbution cost 21931 37370
Administrative Cost 74565 48581
Selling expenses 78951 93425
Net Profit 188605 115847

a)

1. What are the sources of revenue and the detailed list of invoices and transactions?

2. What is the cost of inventory held and why is cost of goods sold too less?

3. What is the reason for growth at a rapid rate that too when the industry is competitive ?

4. What is the reason for distribution costs being doubled in % even though the revenues are falling?

5. What are the details about selling costs as they are increasing that too when the revenues are decreasing ?

b)

* Detailed Inventory as the cost of goods sold are very less and gross profits are too high.

* Details about distribution costs as they are increasing when revenues are falling.

* Details about selling costs as they are increasing when revenues are falling.

* Invoice register to know the actual sales.

c)

Test of Details of Balances will be performed here.

It includes working on physical examination of inventories and paperwork, confirmation, completeness of documents, actual performance and client enquiries.


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