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.
PP’s 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.)
1.0Summary of results
XXXXXXXXXX
£000£000
Turnover XXXXXXXXXX
Gross Profit XXXXXXXXXX
GP% 32.9%34.5%
Net Profit308289
Corporation Tax6257
Dividend138120
Fixed Assets XXXXXXXXXX
Stock140195
Debtors712597
Bank balances4351
Current Liabilities XXXXXXXXXX)
Net Assets XXXXXXXXXX
£000£000
Share Capital XXXXXXXXXX
Reserves562254
Shareholders’ funds XXXXXXXXXX
1.1Stock summary
XXXXXXXXXX
£000£000
At Darlington
Finished products4361
Raw materials4148
Packing materials3847
At Wolverhampton:
Finished products1839
Total140195
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.
1.2Summary of debtors
XXXXXXXXXX
£000£000
Trade debtors535498
Loan to related company12020
Prepayments5779
Total XXXXXXXXXX
1.3Summary 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£000No.of a/c’s circularised
Agreed1091830
Reconciled XXXXXXXXXX
Disagreed23118
No reply95 1525
Total circularised XXXXXXXXXX
Notes:
1.Reconciling items were due to differences between the dates at which invoices and payments were entered in customers’ and in PP’s 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.
1.4Loan 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.
1.5Fixed Assets
All figures £000
COST1.4.07AddnsDisposals31.3.08
Freehold land & buildings XXXXXXXXXX
Plant XXXXXXXXXX
Motor vehicles XXXXXXXXXX
Fixtures & fittings XXXXXXXXXX
Total XXXXXXXXXX
DEPRECIATION1.4.07AddnsDisposals31.3.08
Freehold land & buildings XXXXXXXXXX
Plant XXXXXXXXXX
Motor vehicles XXXXXXXXXX
Fixtures & fittings XXXXXXXXXX
Total XXXXXXXXXX
NET BOOK VALUE XXXXXXXXXX
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.
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 PP’s 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.