Question

Superdry Plc

Planning for the statutory audit for the year ended 30^th April 2021

You are the audit manager in charge of planning the 2021 audit of Superdry Plc. At the time of writing the 2020 financial statements have not been published and the information relates to that which is currently available in the Permanent Audit File for Superdry Plc. It is anticipated that the financial statements for 2020 will have been finalised in June or July 2020 and additional information will be available to support your research.

Attached are extracts from the audited financial statements for the year ended 24^th April 2019

Chairman’s Statement

“The last year has been a year of considerable challenge and change for Superdry.”

The last year has been a year of considerable challenge and change for Superdry with profit warnings issued in October and December 2018 and May 2019, amidst a difficult trading landscape for most fashion retailers. Unseasonably warm weather over a prolonged period had led to a declining sales performance and it appeared that Superdry may have been losing its appeal to its traditionally broad consumer base.

Towards the end of 2018, shareholder and founder Julian Dunkerton engaged with the Board to express his frustration with the Company’s performance and to request a place on the Plc Board. The Board and Julian were unable to reach a consensus as to his ongoing involvement in the business and so, on 1 March 2019 Julian, together with fellow founder and shareholder James Holder, took the step of requisitioning a general meeting of shareholders. That meeting took place on 2 April 2019 and the resolutions proposed at the meeting, to appoint Julian and me to the Board of the Company as Directors, were duly passed.

At the first Board meeting following the General Meeting on 2 April 2019, the Chief Executive Officer, Euan Sutherland, and the Chief Financial Officer, Ed Barker, stood down from the Board with immediate effect. Julian Dunkerton was appointed Interim Chief Executive Officer. At the same meeting the previous Chairman, Peter Bamford, and Non-Executive Director Penny Hughes also stood down from the Board with immediate effect. The other Non-Executive Directors, Minnow Powell, Dennis Millard, John Smith and Sarah Wood, gave notice that they would also step down from the Board on 1 July 2019 after serving the three-month notice period under their contracts. As a result I agreed to take up the role of Chairman with effect from 2 April. I have welcomed the opportunity to work with the existing Non-Executive Directors over the last three months and greatly appreciate the support they have given me. On 3 June 2019 we were delighted to announce that Nick Gresham had joined the Company as Interim Chief Financial Officer.

After just 14 weeks Julian and I are stabilising the business and working hard together to reset Superdry’s strategy in order to provide the foundations for the future. While there may be early wins, the turnaround to sustained profitable growth will take time. We are fortunate that Julian agreed to take on the role as Interim Chief Executive Officer until we find a suitable permanent successor. It will be vital to ensure that the successful candidate can work closely with Julian and the rest of his leadership team to ensure that the direction of the business remains true to Julian’s vision; preliminary work has started to ensure that we have a clear specification of the skills and experience that will be necessary for the role.

The business also needs to modernise itself in terms of its infrastructure, working environment and leadership structure to operate in the multi-channel world of retail. We have made good progress on finding replacement Non Executive Directors. On 4 July we announced the appointment of Helen Weir as Senior Independent Director and Alistair Miller as Chairman of the Audit Committee. They both have extensive relevant experience both in the retail sector and in the public company environment. The search for an additional two Non Executive Directors is also well advanced.

It has been a year of considerable change and I would particularly like to thank all of my new colleagues at Superdry, who are working so hard despite the challenges we are facing. There will be more change to come. I would also like to thank our shareholders and wider stakeholder community for their support as Superdry looks to the future.

Peter Williams Chairman 9 July 2019

Extracted from Note One Principal Accounting Policies

e) Revenue recognition

Revenue is measured at the fair value of the consideration received, or receivable, and represents amounts receivable for goods supplied, stated net of discounts, returns and value added taxes.

Own store revenue: Own store revenue from the provision of sale of goods is recognised at the point of sale of a product to the customer. Own store sales are settled in cash or by credit or payment card. It is the Group’s policy to sell its products to the customer with a right to exchange or full refund within 28 days. Provisions are made for own store returns based on the expected level of returns, which in turn is based upon the historical rate of returns. At the point of sale, a refund liability and corresponding adjustment to revenue is recognised for those products expected to be returned.

Concession revenue: Concession revenues from the provision of sale of goods are recognised gross at the point of sale of a product to the customer; this is on the basis that the vendor acts as principal. Concession revenues are settled in cash, by the concession grantors net of commissions or other fees payable. It is the concessions’ policy to sell its products with a right to exchange within 28 days and a cash refund within 14 days. Provisions are made for concession returns based on the expected level of returns, which in turn is based upon the historical rate of returns. At the point of sale, a refund liability and corresponding adjustment to revenue is recognised for those products expected to be returned.

E-commerce revenue: Revenue from the provision of the sale of goods on the internet is recognised at the point that control of the inventory has passed to the customer, which is when the goods are received by the customer. Transactions are settled by credit card, payment card or PayPal. Customers have a right to exchange or full refund within a range of 21 to 100 days, depending on the website the purchase is made from. Provisions are made for e-commerce credit notes based on the expected level of returns, which in turn is based upon the historical rate of returns. At the point of sale, a refund liability and corresponding adjustment to revenue is recognised for those products expected to be returned.

Wholesale revenue: Wholesale revenues from the sale of goods are recognised at the point that control of the inventory has passed to the customer, which depends on the specific terms and conditions of sales transactions and which is typically upon delivery. Revenues are settled in cash, net of discounts. Provisions are made for Wholesale credit notes based on the expected level of returns, which in turn is based upon the historical rate of returns. At the point of sale, a refund liability and corresponding adjustment to revenue is recognised for those products expected to be returned.

o) Inventories

Inventories are valued at the lower of cost or net realisable value. Cost comprises costs associated with the purchase and bringing of inventories to the distribution centres and is based on the weighted average principle. Provisions are made for obsolescence, mark-downs and shrinkage.

s) Provisions

A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, it is more likely than not that an outflow of economic benefits will be required to settle the obligation and the obligation can be estimated reliably. Provisions are discounted using the risk free rate if the impact on the provision is deemed to be material. Provisions for onerous leases are recognised when the Group believes that the unavoidable costs of meeting or exiting the lease obligations exceed the economic benefits expected to be received under the lease

Note Five

	2019	2018
	£m	£m
Staff costs (note 7)	115.7	116.9
Operating lease rentals for leasehold properties	68.8	73.8
Depreciation and amortisation	41.9	41.1
Impairment of property, plant and equipment and intangibles	42.6	5.3
Restructuring, strategic change and other costs	8.1	-
Onerous lease charge	86.9	2.2
Other (including rates, service charges and professional fees)	223.2	190.0
Total selling, general and administrative expenses	587.2	429.4

Restructuring, strategic change and other costs include a credit of £0.3m which relates to staff costs for the purpose of note 7.

Question:

Extracted from Note One Principal Accounting Policies o) Inventories Inventories are valued at the lower of cost or net realisable value. Cost comprises costs associated with the purchase and bringing of inventories to the distribution centres and is based on the weighted average principle. Provisions are made for obsolescence, mark-downs and shrinkage. Extracted from Superdry Plc audited financial statements for the year ended 24th April 2019

Required.

Draft the audit guidance notes for your audit team to support the attendance at the interim stock count in the largest Superdry Plc warehouse which explores:

1. the risk within this aspect of the audit; and                                                 
2. two key aspects of control you would expect to see evidenced in a high quality stock count and the tests you would perform to ensure these could be relied upon.          
3. Discuss the importance of sampling to your work at the stock count, explaining the audit risks that may arise and the factors you would consider in your selection of the sample.

Answer 1

i.Audit risk means the risk that the auditor gives an inappropriate audit opinion when the financial statement are materially misstated. Thus, it is the risk that the auditor may fail to express an appropriate opinion in an audit assignment.

Risk of material misstatement may be defined as the risk that the financial statements are materially misstated prior to audit. This consists of two components, described as follows at the assertion level:

(a) Inherent risk—The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

(b) Control risk—The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

ii.Review client’s plan for performing inventory count. Plan should include procedures relating to shipments and receipts during count and should also allocate staff responsible for each class of inventory.

Ensure that consigned goods have been segregated.

Evidence of appropriate supervision for those performing count should be examined.

Observe inventory being counted and personally perform test counts to verify counts. Test counts by auditor should include:

— observing employees are adhering to the agreed plan.

— assuring that all items are properly tagged.

— observing that proper amounts are shown on tags.

— determining that tags and summary sheets are controlled and reconciled.

— reconciliation of test counts with tags and summary sheets and discrepancies noted, if any are summarized and agreed with client personnel.

— Staying alert at all times and specifically being cautious about empty boxes, etc. and obsolete items.

— Establishing cut off by documenting last receiving reports and shipping documents for the period.

— Ensuring exclusion of third party stock and damaged or obsolete stock.

— Ensuring the accounting of all stock sheets.

— Investigating any significant differences between the physical stock take and the stock records. Further, the auditor should ask the client personnel to sign all stock count sheets and also agree the variances observed, if any to avoid any conflicts/ difference of opinion at the time of reporting.

When control risk is high and/or client uses periodic system - inventory count should be undertaken at end of period. If client uses perpetual system with proper and adequate records, inventory may be counted at interim dates.Confirm or investigate public warehouse inventory of client and also, any inventory of client lying with   a third party (specifically relevant for cases where the clients get job work done in its process of production)

Perform analytical procedures (comparison tests with industry averages, budgets, prior years, trend analysis, etc.).

— Compute inventory turnover ratio (COGS/ average inventory)

— Perform vertical analysis (inventory/ total assets)

— Compare budgetary expectations vis-à-vis actuals

Examine non-financial information related to inventory, such as weights and measures.

Perform purchase and sales cut-off tests. Trace shipping documents (bills of lading and receiving reports, warehouse records, and inventory records) to accounting records immediately before and after year-end.

With respect to tagged inventory, perform tests for omitted transactions and tests for invalid transactions.

Verify the clerical and arithmetical accuracy of inventory listings.

Reconcile physical inventory amounts with perpetual records.

Reconcile physical counts with general ledger control totals.

iii.

‘Audit sampling’ refers to the application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population.

The objective of the auditor when using audit sampling is to provide a reasonable basis for the auditor to draw conclusions about the population from which the sample is selected.

The factors that should be considered for deciding upon the extent of checking on a sampling plan are following:

(i) Size of the organisation under audit.

(ii) State of the internal control.

(iii) Adequacy and reliability of books and records.

(iv) Tolerable error range.

(v) Degree of the desired confidence

Sampling Risk. The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure. Sampling risk can lead to two types of erroneous conclusions:

(i) In the case of a test of controls, that controls are more effective than they actually are, or in the case of a test of details, that a material misstatement does not exist when in fact it does. The auditor is primarily concerned with this type of erroneous conclusion because it affects audit effectiveness and is more likely to lead to an inappropriate audit opinion.

(ii) In the case of a test of controls, that controls are less effective than they actually are, or in the case of a test of details, that a material misstatement exists when in fact it does not. This type of erroneous conclusion affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect.