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.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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 $ 100 million with profit before tax of $ 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:
1. 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 $ 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.
2.
Depreciation of specialist production equipment has been included in the financial statements at the amount of 12% per annum using the
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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