Essay Preview: Case
Report this essay
To: Kris Munroe, CFO
From:
Re: Audit engagement
Issue: Scrap recorded as an Inventory
GAAP: IAS 2
6 The following terms are used in this Standard with the meanings specified:
Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Bias: Management might have an intention to increase their Current ratio by increasing their current assets
Recommendation: They should not add the scrap in the inventory but they need to expense it. If they expensing the inventory their current ratio will go down.
Audit Risk: Specific risk
Confirming the Accounts Receivable (AR) with Manley Mann
Factor increases risk
Maintain the current ratio of 1.1
Slower USA economy
Sales were drown from the previous year
Volatility in the prices of steel that can encourage them to use the higher sales price to increase their revenue
Factor decreasing risk
They have limited time to get their financial statement audited, which is requested by bank and two of their suppliers.
Audit approach: We need to use the substantive approach as they have weaker control that can lead to more errors.
Materiality: Their financial statement is important to the bank and their two large suppliers; therefore any error in the Accounts receivable can increase or decrease their current ratio. Loans, Current Ratio and covenants are involved, which are based on the financial statement. This makes any error material.
Procedures: Reconciling the confirmation receipt with the Accounts receivable, which will need to check for the following assertions:
Cut off: Match the Accounts receivable with the confirmation receipt to find whether the transactions are noted in the same accounting period
Accuracy: Compare the accounts receivable with the purchase receipt
Risk: Overall risk
Factors increasing risk
Bank indicated interest rate on confirmation 2% higher than the agreement
Volatility in the prices of steel that can encourage them to use the higher sales price to increase their revenue