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You are the auditor of a manufacturing company which makes and sells ladies clothing. While checking the accounts at the date of the balance...

      

You are the auditor of a manufacturing company which makes and sells ladies clothing. While checking the accounts at the date of the balance sheet you receive from management a certificate showing the value of stock and work in progress. You feel that additional work is necessary to confirm the correctness of the figures.

Required:
a. Describe the procedure you would carry out when checking the stock sheets.
b. Indicate the additional work that must be carried out on the work in progress.
c. State three factors that could affect the accuracy of the figures given by the management.

  

Answers


Peter
. a) Auditors duties with regard to stock.

• Ascertaining the accounting policies adopted by the entity for valuing stocks.
• Auditor must consider suitability of accounting policy adopted for valuation of stock by the organisation.
• The auditor should test check the stock sheets or the continuous stock records with relevant documents such as invoices and costing records to determining cost has been correctly arrived at.
• The auditor must examine and test the treatment of overheads
• The auditor must test the treatment and examine the available evidence for items valued at net realisable value.
• The auditor must check the arithmetical accuracy of the calculations made and the disclosure of the accounting policies adopted.
• The auditor must consider the adequacy of the description used in the accounts and the disclosure of the accounting policies adopted.

Review Tests
• Quantity reconciliation of changes in stocks at successive periods ends with records of movements i.e. receipt and issues.
• Comparison of quantities of every kind of stock held at one year end with those held at a previous year end and the related receipts and issues.
• The gross profit ratio is compared to that of the previous year, other companies and budget.
• Review of rate of stock turnover with previous year.
• Comparison of stock figures and budgets sales and particulars
• Consideration of standard costing records, the treatment of variances in the valuation of stocks and work in progress.




Work-in-progress
• Enquiry into the costing system from which work in progress is ascertained
• Enquiry into how reliable the costing system is. A costing system integrated with the financial system will be more reliable because of the discipline of double entity and the inherent checks imposed by external data such as creditors statements.
• Enquiry into checks that are made as part of the system or statistical data concerning inputs of materials and outputs of products and expectations.
• Enquiry into the system of inspecting and reporting on work done so that allowance is made for scrapping and rectification of work.
• Determining the basis in which overheads are included in costs and ensuring that this is based on international accounting standards.
• Making enquiry into the basis on which any profit elements are dealt with. Profits should be eliminated from work in progress.
• Where the organisation constructs internally some of its own fixed assets, the auditor must make sure that such items as are under construction at the year end are not accounted for twice i.e. in fixed assets and in work in progress.

Factors affecting accuracy of figures given by management.

• Incompetent staff
• Wastage/consumption without proper recording
• Possibility of management bias
• Loss or pilferage of stock
• Change of the stock valuation method.

Musyoxx answered the question on March 14, 2018 at 16:21


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