a) Apricot is an information technology (IT) manufacturing company which has been dealing in various IT equipment over 70 years. It operates from one central site which includes the production facility, warehouse and administration offices. You are an audit senior in Juit Company, and you are commencing the audit planning of Apricot Company for the year ending 31 April 2019. Apricot Company sells all of it IT equipment to multinational clients, with 75% being sold to a multi-million IT dealer. The company has a one-year contract to be the sole supplier of IT equipment. In order to secure the contract, the company reduced prices and offered 100 days credit period, while its normal credit period is 28 days, which is an equivalent of month. Currently, Apricot Company has strategically reduced the level of products directly manufactured and rather started to import significant amount of its IT equipment from India. Nearly 65% of the IT equipment is imported and 35% manufactured. Purchase orders for imports are made five months in advance and goods can be in transit for up to three months. Apricot Company accounts for the inventory when it receives the goods. An assessment show that Apricot Company has an equipment manufacturing plant which is now redundant and also assessed to have minimal scrap value. To avoid the disruption of a year-end inventory count, Apricot Company has this year introduced a continuous inventory counting system. Apricot Company divided the warehouse into 12 areas, and each of these are to be counted once within the year. At the year-end, it is proposed that the inventory will be based on the underlining records. Traditionally, Apricot Company has maintained an inventory allowance based on 2% of the inventory value, but management feels that as inventory is being reviewed more regularly, it no longer needs this allowance. In January 2019 Apricot Company had a dispute with its finance director (FD) and he was forced to immediately leave the firm. In his place, the company has asked the financial controller to take over the role temporarily, while they recruit a permanent replacement. The old FD has notified Apricot that he has intentions of suing for unfair dismissal. The company is not proposing to make any provision or disclosure for this, as they are confident the claim has no merit. You are required to: i. Explain the audit risks identified at the planning stage of the audit of Apricot Company. ii. Discuss the importance of assessing risks at the planning stage of an audit. iii. Describe THREE substantive procedures the auditor of Apricot Company should perform at the year-end in confirming each of the following: (1) The valuation of inventory (2) The completeness of provisions of contingent liabilities.
a) Apricot is an information technology (IT) manufacturing company which has been
dealing in various IT equipment over 70 years. It operates from one central site which
includes the production facility, warehouse and administration offices.
You are an audit senior in Juit Company, and you are commencing the audit planning of
Apricot Company for the year ending 31 April 2019.
Apricot Company sells all of it IT equipment to multinational clients, with 75% being sold
to a multi-million IT dealer. The company has a one-year contract to be the sole supplier
of IT equipment. In order to secure the contract, the company reduced prices and offered
100 days credit period, while its normal credit period is 28 days, which is an equivalent of
month.
Currently, Apricot Company has strategically reduced the level of products directly
manufactured and rather started to import significant amount of its IT equipment from
India. Nearly 65% of the IT equipment is imported and 35% manufactured. Purchase orders
for imports are made five months in advance and goods can be in transit for up to three
months. Apricot Company accounts for the inventory when it receives the goods.
An assessment show that Apricot Company has an equipment manufacturing plant which
is now redundant and also assessed to have minimal scrap value.
To avoid the disruption of a year-end inventory count, Apricot Company has this year
introduced a continuous inventory counting system. Apricot Company divided the
warehouse into 12 areas, and each of these are to be counted once within the year. At the
year-end, it is proposed that the inventory will be based on the underlining records.
Traditionally, Apricot Company has maintained an inventory allowance based on 2% of
the inventory value, but management feels that as inventory is being reviewed more
regularly, it no longer needs this allowance.
In January 2019 Apricot Company had a dispute with its finance director (FD) and he was
forced to immediately leave the firm. In his place, the company has asked the financial
controller to take over the role temporarily, while they recruit a permanent replacement.
The old FD has notified Apricot that he has intentions of suing for unfair dismissal. The
company is not proposing to make any provision or disclosure for this, as they are confident
the claim has no merit.
You are required to:
i. Explain the audit risks identified at the planning stage of the audit of Apricot
Company.
ii. Discuss the importance of assessing risks at the planning stage of an audit.
iii. Describe THREE substantive procedures the auditor of Apricot Company
should perform at the year-end in confirming each of the following:
(1) The
(2) The completeness of provisions of
b) Supreme Ventures is a manufacturer of quality home accessories and a client of your
audit firm. You are carrying out the audit of the purchases system of Supreme Ventures.
The company has revenue of Ghc 12.5 million, and all the shares are owned by Mr. Addo
and Mr. Tekpe, who are non-executive directors and are not involved in the day-to-day
running of the company.
Kofi Badu is the accounts clerk who maintains all the accounting records and prepares the
annual financial statements.
The company uses a standard computerised accounting package.
You have determined that the purchases system operates as follows:
• When materials are required for production, the production manager sends a
handwritten note to the buying manager. For orders of other items, the department
manager or managing director sends a handwritten note to the buying manager. The
buying manager finds a suitable supplier and raises a purchase order. The purchase
orders are signed by the managing director. Purchase orders are not issued for all
goods and services received by the company.
• Materials for production are received by the Goods Received Department, who
issue a goods received note (GRN), and sends a copy to the accounts clerk. There
is no system for recording receipt of other goods and services.
• The accounts clerk receives the purchase invoice and matches it with goods
received notes and purchase order (if available). The managing director authorises
the invoice for posting to the purchase ledger.
• The accounts clerk analyses the invoice into relevant nominal ledger accounts codes
and then posts it.
• At the end of each month, the accounts clerk prepares a list of payables to be paid.
This is approved by the managing director.
• The accounts clerk prepares the cheques and remittances and posts the cheques to
the purchase ledger and
• The managing director signs the cheques and accounts clerk sends the cheques and
remittances to the payables.
Mr. Addo and Mr. Tekpe are aware that there may be weaknesses in the above system
and have asked for advice.
You are required to:
i. Explain five (5) control deficiencies in Supreme Ventures’s purchases system
and suggest improvements to overcome the deficiencies.
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