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Tutorial solutions - audit review and finalisation

Course

Concepts In Biochemistry And Microbiology (SHGB6115 )

16 Documents
Students shared 16 documents in this course
Academic year: 2020/2021
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Universiti Malaya

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Tutorial solutions: Audit review and finalisation

Question 1: Stinky Ltd

Matters indicating going concern risk Importance

Fixed price, short term contracts On fixed price contracts any cost over-runs may result in a loss being made.

90% of the balance paid at the end of the contract

Pressures on cash flow as Stinky have to pay upfront for their materials, but the customer does not pay until the job is complete. 10% of the balance paid 6 months after completion of the contract

This may not ever be recovered if the customer is dissatisfied – this will reduce margins and puts pressure on cash flows which are already tight.

Bank loan is re-payable in December 2014

It appears that Stinky is concerned about its ability to repay this

  • they are trying to sell their retail operation in order to meet this payment. If Stinky are unable to sell their retail operation in time then they may be left unable to repay the loan at all. In this instance, the lender could apply for the company to be wound up.

Currently making a loss The company are failing to generate cash / profits from their current operations – this is not sustainable in the long term.

Legal claim from NewHomes Plc It seems likely that Stinky will lose a major customer and may have to pay substantial damages placing further pressure on profits and cash flow. At their overdraft limit The bank may not increase the overdraft facility and the company is reliant on short term finance that could be withdrawn without notice.

Question 2: Kitty Ltd

This should be investigated further in order to confirm that:

  1. The goods are included within inventory at the year end
  2. Not included in Sales (or Cost of Sales) or receivables.

This is an adjusting event since – the credit note provides evidence of a condition that existed at the

year-end i. the customer did not accept the goods delivered by Kitty Ltd.

The auditor should also consider whether the return of goods may indicate that they have a net

realisable value of lower than cost – if this is the case then the inventory may require writing down.

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Tutorial solutions - audit review and finalisation

Course: Concepts In Biochemistry And Microbiology (SHGB6115 )

16 Documents
Students shared 16 documents in this course

University: Universiti Malaya

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Tutorial solutions: Audit review and finalisation
Question 1: Stinky Ltd
Matters indicating going concern risk Importance
Fixed price, short term contracts On fixed price contracts any cost over-runs may result in a loss
being made.
90% of the balance paid at the end of
the contract
Pressures on cash flow as Stinky have to pay upfront for their
materials, but the customer does not pay until the job is
complete.
10% of the balance paid 6 months after
completion of the contract
This may not ever be recovered if the customer is dissatisfied –
this will reduce margins and puts pressure on cash flows which
are already tight.
Bank loan is re-payable in December
2014
It appears that Stinky is concerned about its ability to repay this
– they are trying to sell their retail operation in order to meet this
payment. If Stinky are unable to sell their retail operation in time
then they may be left unable to repay the loan at all. In this
instance, the lender could apply for the company to be wound
up.
Currently making a loss The company are failing to generate cash / profits from their
current operations – this is not sustainable in the long term.
Legal claim from NewHomes Plc It seems likely that Stinky will lose a major customer and may
have to pay substantial damages placing further pressure on
profits and cash flow.
At their overdraft limit The bank may not increase the overdraft
facility and the company is reliant on short term finance that
could be withdrawn without notice.
Question 2: Kitty Ltd
This should be investigated further in order to confirm that:
1) The goods are included within inventory at the year end
2) Not included in Sales (or Cost of Sales) or receivables.
This is an adjusting event since – the credit note provides evidence of a condition that existed at the
year-end i.e. the customer did not accept the goods delivered by Kitty Ltd.
The auditor should also consider whether the return of goods may indicate that they have a net
realisable value of lower than cost – if this is the case then the inventory may require writing down.

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