Question

You are the audit senior on the Wendig Limited (Wendig) engagement and have commenced planning for the 2019 audit. You have been able to obtain the following information concerning the various segments of the business:

A. Inventory Balances and Purchase Transactions Although fairly voluminous, purchase transactions at Wendig are not complex. Inventories are tightly controlled so that overstocking and obsolescence are normally not a problem. Inventory, although not as liquid as cash, is subject to theft. At Wendig, finished packaged products are shipped immediately to customers, although large quantities of purchased merchandise are maintained on hand. The personnel handling purchases and inventory transactions are, in general, competent. Access to warehouse is unrestricted.

B. Trade Receivables and Credit Sales System These transactions are not particularly complex at Wendig, nor (except for the allowance for doubtful debts account) is there any degree of estimation involved. The persons processing revenue and trade receivables transactions are thoroughly familiar with the procedures and are generally competent. Sales transactions processing does, however, entail the completion of many transactions. Competition from overseas is becoming an issue, and because of the poor general economic conditions some customers have requested extensions of time to pay.

C. Property, Plant and Equipment (PPE) There are generally few fixed asset transactions. The transactions are often not complex but an element of risk can be introduced when management has to make decisions concerning whether to capitalise or expense items. PPE, being less liquid than other assets, is generally not subject to theft. In recent years a number of PPE items have been manufactured in-house. You have noticed, as a result of your analytical procedures, that repairs and maintenance expense has dropped considerably in the last two years. Asset registers are maintained on a timely basis, and staff are generally competent.

D. Trade Payables Transactions and Balances Although not complex, the volume of trade payables transactions is high. There is a risk with trade payables balances that personnel may fail to record them in the books, as the company has applied to the bank for an increase in its overdraft and wants to impress the bank with a strong current ratio. At Wendig a request form is first prepared for all items that are to be paid through the cash disbursements system. The previous trade payables clerk, who had been with the company for eight years, left in December 2018. A new clerk was hired but is not yet thoroughly familiar with the procedures.

Required:

For each of the above account balances and classes of transactions (provide justifications in each case):

1. Determine any significant risks with reference to relevant facts;

Answer 1

Answer:

A. (i)- As mentioned in given statement, The purchasing procedure of Inventory is easy task but As an Auditor I will examine that wheather the purchasing authority and selling and distributing of finished goods are same or not. If yes, than it is the serious matter of concern and as an auditor i will briefly examine the all purchasing and issuing records of goods.

A (ii)- Large inventory is manage in the organisation. Hence, an auditor should assess the procedure of maintaining the inventory Like:

1. Wheather Goods purchasing authority and Manage authority are same Or not.                                                                                                                          2. To find wheather Closing stock of previous year and opening stock of current year are same or not.                                                                                               3. Amount of damage during the year (If any).                                                       4. Since wherehouse stock is access without any restriction. Hence: Stock transfer to warehouse should be reconciled.

B. In The Organisation the sale transactions are easly processed but there are chances of occurance Bad debts and increase of credit period. Following justification will be given:

Fact-1: The sales transactions and Trade receivable are manage by single person only. An auditor should varify wheather concerend person is authorise for trade and cash discount or not. If yes there are Risk of melafide practice.

Fact-2: Allowance of bad debts and extension of credit period is the risk factor for an organisation. It includes huge amount of revenue losses, which affect the financial position of of the organisation in adverse way.To mitigate this problem I will examine that whether company regularly sold the goods to the customer whose debt clearance is poor or they are going in liquidation process.

Risk : Bad Debts and extansion of credit period includes huge amount of financial losses.

C. Property, Plant and Equipment (PPE) Property, Plant and Equipment (PPE) Property, Plant and Equipment (PPE)

1. Property, Plant and Equipment (PPE), having useful life more than a year generally includes in Fixed Assets (Non-Current Assets).

Fact-1: Wheather an equipment has Useful life more than a year should includes in fixed assets and equipment has Useful life one year or less than a year should includes in Expences. The repair and maintenace is dropped considerly, It means the coming assets improve the operational activity and has an identity in as fixed assets. So, useful life of assts is the basic rule to assess the nature of Assets.

Risk: If organisation treat the fixed assets as revenue expenses, It result huge operation cost and expected profitability will be convert into losses.

D. To attract the overdraft facilities, The trade payable not recorded in the books of accounts. It leads the missmanagement of records and affect the Goodwill and creditability of the Organisation.

As an Auditor, I will trace all credit purchase and take into account pending transactions. So, that value of current liabilties find out.

Fact-1: Company looking out for cash disbursement option, which may easy for getting discount from vendors but in practicle terms it is not an easy task. Because it may decrease required working capital which may affect day to day operations.