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I came across this in the course notes under the topic ‘Cut Off:Purchases’:
We are looking here at consistency. At one level that doesn’t really matter whether goods are included in inventory or have not yet been received. But we must be consistent: if they are in closing inventory we have to recognise that we have purchased them; if they are not in closing inventory because they haven’t arrived yet, we mustn’t recognise that we have purchased them.
My question is what about goods in transit which are to be recorded as the as the customer’s property upon shipping?
Also, what is the treatment if the customer has already paid for inventory which is in transit, but is to be recorded as their property upon destination? What would be the accounting entries if they aren’t received until the following period?
I have a second question on the calculation of materiality. I have noticed that the way ACCA calculates materiality is by dividing the misstatement (for e.g irrecoverable debts) by the benchmark item (for e.g profit before tax) and then finding it’s percentage. Is this percentage then compared to the benchmark percentage? (for e.g if it exceeds 5%)?
The way I calculate materiality is by finding planning materiality (5% of profit before tax), then calculating perfomance materiality (50% or 75% of planning materiality) then comparing this figure to the misstatement.
ACCA’s method appears to be easier, I just don’t know what they’re comparing the percentage to.
GIT: you would look at contracts to see when ownership passed: despatch or receipts.
IF GIT are customer’s property they should be in sales and receivables and not in inventory.
With payment in advance the entry would be DR Cash, CR Payments received in advance (a liability).
When goods are received, DR Payments received in advance, Cr sales.
The only difference in materiality calculations is whether you are comparing \ % or an absolute figure. ACCA would calculate the Misstatement/Profit – say 12%. In this example the % error is above the 5 – 10% range, so material.
Ok. What if the client is the one to record goods in transit? How would an auditor test goods in transit which is rightfully recorded in inventory, since it is to be recorded as inventory upon shipping, but it is not physically seen in inventory.
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