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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Image to the questions is attached below. Questions 1.Using the information provided, identify and describe five audit risks, and explain the auditor's response to each risk, and in planning the audit if Fizzyco. 2. Describe the substantive procedures the audit team should perform to obtain sufficient and appropriate audit evidence about the following three matters: a. The treatment of the £5 million expenditure incurred on improving the factory production process; b. The release of the £1.5 million allowances for receivables; and c. The damage inventory. 3. Define a 'test if controls' and provide three examples of test of controls in relation to the audit and sales receivables. 4. Define a 'substantive procedure' and provide three examples of substantive procedures in relation to the audit and sales receivables.

Transcribed Image Text:Fizzyco PLC manufactures soft drinks and its year end is 31 December 2019. You are the audit manager and you are currently planning the audit of Fizzyco. You attended the audit planning meeting with the audit partner and Fizzyco's finance director last week. Some of the extracts of the minutes from the meeting are shown below. You are reviewing these as part of the process of preparing the audit strategy. Extracts from the minutes of audit planning meeting for Fizzyco PLC: 1. Fizzyco's trading results have been strong this year and the company is forecasting revenue of £85 million, which is an increase from the previous year. The company has invested significantly in the cola and fizzy drinks production process at the factory. This resulted in expenditure of £5 million on updating, repairing and replacing a significant amount of the machinery used in the production process. 2. As the level of production has increased, the company has expanded the number of warehouses it uses to store inventory. It now utilises 15 warehouses; some are owned by Fizzyco and some are rented from third parties. There will be inventory counts taking place at all 15 of these sites at the year end. 3. A new accounting general ledger has been introduced at the beginning of the year, with the old and new systems being run in parallel for a period of two months. 4. As a result of the increase in revenue, Fizzyco has recently recruited a new credit controller to chase outstanding receivables. The finance director thinks it is not necessary to continue to maintain an allowance for doubtful receivables and so has decided to remove the opening allowance of £1-5 million. 5. In addition, Fizzyco has incurred expenditure of £4-5 million on developing a new brand of fizzy soft drinks. The company started this process in January 2013 and is close to launching their new product into the market place. 6. The finance director stated that there was a problem in November in the mixing of raw materials within the production process which resulted in a large batch of cola products tasting different. A number of these products were sold; however, due to complaints by customers about the flavour, no further sales of these goods have been made. No adjustment has been made to the valuation of the damaged inventory, which will still be held at cost of £1 million at the year end. 7. As in previous years, the management of Fizzyco is due to be paid a significant annual bonus based on the value of year-end total assets.

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