AUDITING
COURSEWORK
2012
AUDITING
Coursework 2013
Study the case below and answer the questions that follow it.
PERFECT PIES LTD
Perfect Pies (PP)ltd makes pies, pastries and pizzas, which it sells to retailers under its own brand name and also supplies a major super market chain. It has two sites: the bakery and its head office at Darlington, and a distribution depot in Wolverhampton.
PPs year end is 31 March 2012 and its accounts are required to be ready for publication by 31 May 2012. It is now 8th May and the final audit work is due to be completed by 16th May. The manager in charge of the audit is reviewing the audit file with a view to identifying any unresolved problems.
(You may assume an interim audit has been performed and that its results were satisfactory except for any deficiencies specifically mentioned in the case study.)
1.0 Summary of results
2012 2011
£000 £000
Turnover 3768 3477
Gross Profit 1240 1199
GP% 32.9% 34.5%
Net Profit 308 289
Corporation Tax 62 57
Dividend 138 120
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Fixed Assets 1940 1745
Stock 140 195
Debtors 712 597
Bank balances 43 51
Current Liabilities (433) (494)
Net Assets 2402 2094
£000 £000
Share Capital 1840 1840
Reserves 562 254
Shareholders funds 2402 2094
1.1 Stock summary
2012 2011
£000 £000
At Darlington
Finished products 43 61
Raw materials 41 48
Packing materials 38 47
At Wolverhampton:
Finished products 18 39
Total 140 195
Notes:
The following audit work has been carried out on the stock at Darlington:
– attended physical stocktake held on 31 March and performed test counts;
– ensured that material items of stock had been valued at the lower of cost and net realisable value;
– ensured that none of the stock on hand at 31 March was damaged or out of condition
The results of all tests were satisfactory.
Because of staff shortages, a physical count was not performed at Wolverhampton. The stock figure was extracted from stock records maintained at the depot. The audit team paid a one day visit to the Wolverhampton depot, in the course of which it performed the following audit work.:
– agreed the stock balance in the accounts to the stock records.
– discussed the year end stock figure with the depot manager and ascertained that he considered the figure to be reasonable and that his opinion year end stock did not require any provision for obsolete/damaged items.
1.2 Summary of debtors
2012 2011
£000 £000
Trade debtors 535 498
Loan to related company 120 20
Prepayments 57 79
Total 712 597
1.3 Summary of results of debtors circularisation
Work done
A sample of 48 debtors was circularised. This represented all balances over £10,000 at 31 March and a representative sample of 25 others. A reminder letter was sent to all who had not replied by 23rd April.
Results
Results were as follows on the basis of replies received up to 8th May.
% of value
Notes £000 No. of a/cs circularised
Agreed 109 18 30
Reconciled 1 140 14 37
Disagreed 2 31 1 8
No reply 95 15 25
Total circularised 375 48 100
Notes:
1.Reconciling items were due to differences between the dates at which invoices and payments were entered in customers and in PPs records.
2.The disagreement relates to an invoice for £3,000 sent to this customer in December 2011. The customer is refusing to pay on the grounds that the goods were damaged in transit. Note only the £3,000 is disputed the rest of the balance is accepted as valid.
1.4 Loan to associated company
Included in debtors is an unsecured loan made to Bartleby ltd, a private company that is a supplier of PP and in which PP is considering acquiring 20% of the share capital. PP loaned Bartleby £20K in 2011 to provide working capital, and this amount has now been increased to £120K. No repayments have been received. The Finance director of PP was unwilling for the auditors to include this balance in the circularisation of debtors. Accordingly audit work has been confined to the following:
– agreed balance outstanding to the nominal ledger;
– traced payment to cash book, bank statement and returned cheque and ensured the cheque payee is Bartleby;
– discussed the balance with Mrs Bateman, the finance director, who stated that in her opinion it is fully recoverable.
1.5 Fixed Assets
All figures £000
COST 1.4.07 Addns Disposals 31.3.08
Freehold land & buildings 700 400 100 1000
Plant 2200 1000 900 2300
Motor vehicles 740 700 640 800
Fixtures & fittings 105 200 5 300
Total 3745 2300 1645 4400
DEPRECIATION 1.4.07 Addns Disposals 31.3.08
Freehold land & buildings 125 20 – 145
Plant 1575 850 600 1825
Motor vehicles 250 250 135 365
Fixtures & fittings 50 80 5 125
Total 2000 1200 740 2460
NET BOOK VALUE 1745 1940
Notes
1.Of the additions to land and buildings half (£200,000) is in fact the surplus arising on revaluation. This revaluation was carried out by one of the directors of PP who is a surveyor.
.0/msohtmlclip1/01/clip_image002.gif”>2.The figure for additions to plant has been overstated. A number of orders for items of plant not confirmed before the yearend have been accrued instead of being treated as capital commitments. As a result fixed assets and current liabilities have both been overstated by £75,000.
Assuming the results of the audit were satisfactory in all other areas:
You are required to act as the audit manager reviewing the working papers and
1. Identify the unresolved problems which need to be addressed and discuss why each is a problem for the auditor and the potential impact of each on the financial statements.
2.Suggest how each of the problems might be resolved by the audit team and/or PPs management in the time available. The alternatives might include:
-altering the accounts;
-qualifying the audit report;
-obtaining management assurances in the letter of representation;
-performing additional audit work, etc
In each case you should be specific about the steps to be taken e.g. what further tests should be performed (if any), what audit qualification is needed (if any) etc. You may make assumptions as necessary or suggest alternative actions depending on the outcome of further work or management reaction. There is no definitive answer to question 2.
Guidance and criteria
Write as a report by the audit manager to the audit partner responsible for the audit with the dual purposes of a) summarising the main problems and unresolved points indicating the potential impact on the financial statements and the materiality of each matter for audit purposes; b) setting out the further steps that could be taken in the time available as indicated in 2 above. There is no uniquely correct answer and the possible further steps suggested above is not exhaustive.
Your report should consist of a brief introduction setting out the size and nature of the company, its overall financial position, a list of the audit problem areas (no need to go into detail at this stage) and the timetable for completion.
This should be followed by 4 separate sections clearly identified:
Stock
Debtors
Loan to associated company
Fixed assets
Finally you should conclude on the possible implications for your audit report depending on the outcome of the further steps you may take and any assumptions you have made.
The assignment represents 40% of the total module mark.
Marks will be allocated as:
Report style, introduction and conclusion 20%
Stock 20%
Debtors 20%
Loan to associated company 20%
Fixed assets 20%
To obtain a good mark you need to:
Communicate clearly (structure and clarity of expression)
Be able to identify relevant information (and avoid devoting too much time to matters which are not of great significance)
Be able to demonstrate knowledge of audit procedures by commenting on what has been done and recommending further work.
Demonstrate an understanding of application of procedures by showing an awareness of what can be realistically achieved in the available time
Demonstrate an ability to evaluate data by interpreting its inter-relationships with other information to identify significance.
As a guide to length answers of approximately 1500 words are expected but good answers can be written in less. All reports must be word processed and should inno circumstances exceed 2000 words. Hand in at TC375 date to be advised
NB An electronic copy must additionally be submitted through Blackboard for plagiarism checking. Paper copies will not be marked if not also submitted electronically by the due date. Be warned that the software checks assignments against other assignments as well as articles and internet sources so your assignment must not be too similar to other students assignments as well as not being too closely extracted from articles and on-line sources.
Important tip: You can submit drafts through Blackboard from 2 weeks before the due date and view the originality report which will indicate the similarity your assignment has with other sources.
(This report may take an hour or two to be generated and sometimes longer so you should plan to return at a later time or the next day and not expect instant feedback)
If the report indicates your draft is not sufficiently original you can redraft it and resubmit it and view the revised report. You can if necessary repeat this process as many times as you like up until the due date. You cannot submit through Blackboard after the due date. You must in any case submit your paper copy at TC375 no later than the due date. The paper copy you submit at TC375 must be exactly the same version as the final copy you submit through Blackboard.
Warning: If you submit through Blackboard at the last minute e.g. on the due date, and the originality report indicates a high degree of similarity with other sources you will have no opportunity to revise it and must submit a paper version at TC375 as it is. Obtaining a last minute originality report which indicates your assignment may be too similar to other sources will not be accepted as a reason for an extension or late submission.Where an electronic draft has been submitted on or shortly before the due date and no final paper version has been submitted on time the last submitted electronic version may be taken as your final submission and where appropriate put through the Universitys plagiarism procedures.
If, very exceptionally, you have agreed an extension in advance for valid medical or other reasons and are submitting after the due date you must submit through TC375 with an electronic copy attached .