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Hi John,
I was working in audit procedures in the revision kit and the answers of mine were not similar to those in the revision kit.
I am unsure where my procedures stand in a markers perspective as it is not in the answer given. Could you take a look and see if these are acceptable?
a) i) Revenue Recognition
Inspect managements working paper on revenue recognition to ensure that only 1/3 of revenue is recognised for the year end and not for the whole development
Review correspondence between client and customer to notify a further 2 months is necessary and the response of client. [This may not be acceptable since it is stated in the Qs that they notified the customer]
ii) Sale of Division
Review correspondence with buyers to assess likelihood of purchase and evaluate the selling price of division to see if it is reasonable.
Inspect working paper of the forecast to see if Treasured Homes forecasted revenue were included into Bill Co audit.
Many Thanks.
“[This may not be acceptable since it is stated in the Qs that they notified the customer]”
But you would still want to examine / review it and probably obtain a copy for your audit file
How many marks for Revenue Recognition?
I hope that it was no more than 2 marks available because that’s all you’ve got!
“Review correspondence with buyers to assess likelihood of purchase and evaluate the selling price of division to see if it is reasonable.”
Two separate points here. Drop the ‘and’ and make two separate sentences out of “Review” and “Evaluate”
“… evaluate the selling price of division to see if it is reasonable.”
Have you become a financial advisor well versed in the reasonableness of prices to be charged for the sale of a division? When you find the figure, how do YOU know whether it’s reasonable or not?
And what are you going to do if you believe that it’s too little (or even too much)?
“Inspect working paper of the forecast to see if Treasured Homes forecasted revenue were included into Bill Co audit.”
Not got the question in front of me but this sounds to me like a strange scenario!
Again, how many marks is this topic worth because, again, you’ve only got 2 of them?
Hi Mike,
The question was for 16 marks and split between matters to consider, risk of MM and procedures. I had several other points but I was most unsure about the above 4.
*They had given a forecasted PBT and Revenue in the question.
There was 2 issues discussed which was
1) revenue recognition
A development contract which was going to profit the company by £200,000 had extra additional cost of £350,000. Development is 1/3 completed and will take a further 15 months to finish. The contract pice is fixed and the additional cost must be covered by BillProcedures
– Inspect correspondence between architect to ensure that 350,000 includes all cost and cross reference with the quotations.-Instead of assessing the reasonableness myself, can I bring in an independent expert to assess the reasonableness?
2) NCA Held for sale
Management decided to sell division. It operates separately from the rest of business, and generates 15% of total revenue. Interest have been expressed and sale to be negotiated in 2 months time.Procedures
-Review BOD meeting to confirm that the approval to sell division ‘treasured homes’“Procedures
– Inspect correspondence between architect to ensure that 350,000 includes all cost and cross reference with the quotations.-Instead of assessing the reasonableness myself, can I bring in an independent expert to assess the reasonableness?”
Yes to both
And now that you’ve given me some more information, your original first point is interesting! Does the question ask only about revenue recognition of about the contract generally?
The Treasured Homes procedure is fine, so long as it’s accompanied by a number of other points
If it’s about the contract, I would have expected you to go in heavily about recognising the forecast loss of $150,000 in full
I have picked up that the question relates to revenue recognition. It did not specify contract.
Sorry, this is unrelated to the question above but I wasn’t sure if I should start a new topic since I have this pending.
I attempted a question[OAK] relating to an analytical review which is ratios related.
The P/L statement was 11months to Y/E.Is it necessary to translate the figures to 12months? – based on BPP answers.
During my attempt, I used the figure from the question directly because my defence is that I would have to round all my figures upwards if I was performing a 12months P/L.
Difficult to compare the levels of revenue when one is for 12 months and the other for only 11 months!
Of course you need to gross up – but not every calculation
For example, unless the entity is majorly seasonal and therefore the possibility that month 12 is not a typical month, you can’t gross up payables nor receivables. Nor inventory
Any ratio calculation like current ratio or borrowing ratio, inventory turnover, gross profit and net profit, receivables days and payables days … these should all be valid when calculated based on 11 months’ figures just as much as on grossed up 12 month figures
But asset turnover and ROCE would need extrapolation
You just need to think about the basis of these calculations to work out which should be grossed up and which others don’t need it
If both of them are 11 months to year end, it would be fair comparison?
It is the inventory days, receivables and payables that are being grossed up to 12months-based on the book.
“If both of them are 11 months to year end, it would be fair comparison?”
Yes, you would be comparing like with like
It is the inventory days, receivables and payables that are being grossed up to 12months-based on the book.”
That would be avoidable if the days had been adjusted from 365 down to 334
Think about it …
… receivable days and payable days are, in ordinary English “the number of days-sales in receivables / payables” and we arrive at “days-sales (ie sales per day)” by dividing the revenue figure by the number of days
And if the number of days is not 365, then we divide by the appropriate number – in your case it’s 334 (365 – 31)
Receivable days = receivables x 365 / revenue
In this question will IFRS 15 be used. And in any revenue recognition and construction contracts questions IAS 18 and 11 are not relevant
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