ACCA F8 - Audit and Assurance Revision Kit 2016

Marks
Provisions:
– Discuss with management
– Review correspondence with FD
– Write to lawyers
– Review board minutes
– Obtain written representation
Marks awarded for tests for additional provisions and contingent liabilities Max 3
Total marks 30
(a)
Identified risks at the planning stage
Identified risk
Extending the credit period to
Homewares results in irrecoverable
receivables and liquidity problems
Inventory may be overvalued because
Smoothbrush sells the majority of its
goods at reduced prices.
Plant and equipment is overvalued in
the financial statements (FS)
Cut-off treatment of purchases and
inventory may not be correct
The new inventory system was
inadequately implemented resulting in
misstated inventory balances.
Explanation
A four month credit period may result in debts up to three
months older than under previous credit terms. These older
balances may ultimately become irrecoverable or resultant cash
flow problems may impact on the gong concern status of the
company.
Inventory should be stated at the lower of cost and net
realisable value (NRV) in accordance with IAS 2. Selling prices
are heavily discounted for goods sold to Homewares, and the
NRV of some inventory items may be below cost but with no
adjustment having been made to write down inventory.
Per IAS 16 and IAS 36, plant and equipment should be included
in the FS at the lower of its carrying value and recoverable
amount. The redundant plant and equipment at the production
facility will probably need to be valued at scrap value, but may
be included at a higher value of cost less depreciation.
Smoothbrush records its inventory when received for imported
goods from South Asia but the fact that paint can be in transit
for up to two months means it is possible that a liability and
purchase are recognised pre year end, but without a
corresponding inventory entry being made. All entries should
be made in the same period, the correct period being that in
which the risks and rewards of ownership pass to
Smoothbrush.
Smoothbrush introduced a continuous/perpetual inventory
counting system in the year to be used for recording year end
inventory. If any stage of the system implementation was
flawed, then inventory in the financial statements could be
misstated.
Answers 101