Morning Delight Company manufactures cereals and operates five factories, six warehouses and five distribution depots in major cities in Ghana. The audit for the year ended 31 December 2019 is almost complete and the financial statements and auditor’s report are due to be signed shortly. Profit before taxation is Ghc 11.6 million. The following events have occurred subsequent to the year-end and no amendments or disclosure have been made in the financial statements. Event 1 – Fire Outbreak On 2 February 2020, a fire occurred at the largest of the distribution depots. The fire resulted in extensive damage to 41% of the company’s vehicles used for dispatching goods to costumers, however, there was no significant delays to customers’ deliveries. The company estimated the level of damage to the vehicles to be in excess of Ghc108,000. Only a minimal level of inventory, approximately Ghc 42,000, was damaged. Secure Insurance company, the insurers of Morning Delight Company has started to investigate the fire to assess the likelihood and the level of payment, however, there are concerns that the fire was started deliberately, and if it is true, it will invalidate any insurance cover. Event 2 – Inventory On 22 February 2020, it was discovered that a large batch of Morning Delight Company’s new cereal brand ‘Anopayede’ held in inventory at the year-end was defective, as the cereal contained too much sugars. To date no sales of this new cereal have been made. The cost of the defective batch of inventory is Ghc 1,500,000 and the defects cannot be corrected. However, the scrapped cereal can be utilized as a raw material as an alternative cereal brand at a value Ghc 84,000. Based on the two subsequent events above you are required to: i. Explain whether the financial statements require amendment, and ii. Describe audit procedures which should now be performed in order to form a conclusion on any required amendments.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
a) Morning Delight Company manufactures cereals and operates five factories, six warehouses and five distribution depots in major cities in Ghana. The audit for the year
ended 31 December 2019 is almost complete and the financial statements and auditor’s report are due to be signed shortly. Profit before
been made in the financial statements.
Event 1 – Fire Outbreak
On 2 February 2020, a fire occurred at the largest of the distribution depots. The fire resulted in extensive damage to 41% of the company’s vehicles used for dispatching goods
to costumers, however, there was no significant delays to customers’ deliveries. The company estimated the level of damage to the vehicles to be in excess of Ghc108,000. Only
a minimal level of inventory, approximately Ghc 42,000, was damaged. Secure Insurance company, the insurers of Morning Delight Company has started to investigate the fire to
assess the likelihood and the level of payment, however, there are concerns that the fire
was started deliberately, and if it is true, it will invalidate any insurance cover.
Event 2 – Inventory
On 22 February 2020, it was discovered that a large batch of Morning Delight Company’s
new cereal brand ‘Anopayede’ held in inventory at the year-end was defective, as the cereal contained too much sugars. To date no sales of this new cereal have been made. The cost
of the defective batch of inventory is Ghc 1,500,000 and the defects cannot be corrected.
However, the scrapped cereal can be utilized as a raw material as an alternative cereal brand
at a value Ghc 84,000.
Based on the two subsequent events above you are required to:
i. Explain whether the financial statements require amendment, and
ii. Describe
conclusion on any required amendments.
b) You are the manager in charge of the audit of Nananom Company, a public limited
liability company which manufactures specialist equipment and costumes for use
in Kumahwood and Nafftti films in Ghana. Audited revenue is Ghc 100 million with profit before tax of Ghc 6.25 million.
Audit work up to but not including, the obtaining of written representations has
been completed. A review of the audit file has disclosed the following outstanding
point:
Kumahwood
Nananom Company is facing a potential legal claim from the Kumahwood company in respect of a defective equipment that was supplied for one of their films. Kumahwood sustains that the equipment built was not robust enough, while
the directors of Nananom argue that the specification was not sufficiently detailed.
Nananom were of the view that using such sophisticated equipment under conditions that require heavy falls, may render them not in the best of working conditions after a couple of films produced. However, this is what Kumahwood
expected.
Solicitors are unable to determine liability at the present time. Kumahwood has
therefore slapped a claim for Ghc 3.33 million being the cost of a replacement equipment and lost production time on Nananom. The directors’ opinion is that the
claim is not justified.
Depreciation of specialist production equipment has been included in the financial
statements at the amount of 12% per annum using the
The treatment is consistent with prior accounting periods (which received an
unmodified auditor’s report) and other companies in the same industry. Sales of old
equipment show negligible profit or loss on sale. The audit senior, who is new to
the audit, feels that depreciation is being undercharged in the financial statements.
You are required to:
i. Discuss whether or not a paragraph is required in the written representation for
each of the above matters.
c) A suggested format for the written representation has been sent by the auditors to
the directors of Nananom. The directors have stated that they will not sign the written
representation this year on the grounds that they believe the additional evidence that it
provides is not required by the auditor.
You are required to:
i. Discuss the action the auditor may take as a result of the decision made by the
directors, not to sign the written representation.
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