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Q1.
(a) How does a consignment stock arrangement works? Is it that the inventory still belongs to the company and the vendor just help the company to sell off the inventory? Any unsold goods will be returned to the company and the vendor will get commissioned from the goods being sold?(b) If the goods are stolen or damaged, who will account for it?
Q2. If a company breach the law and regulations, what obligations does the auditor have to consider?
Q3. Can you name some examples of non compliances of law and regualtions that have little impact on the financial statements.
A) goods sent to an agent (a “vendor” in your post) on consignment remain the goods of the consignor or principal (the “company” in your post)
So until the very instant when the agent sells the goods to some third party, those goods still belong to the principal
At the year end, the agent should tell the principal how many goods are still in the possession of the agent. The principal will calculate the cost value of those goods and include that value in inventory.
When the agent sells any goods then on those occasions the agent earns their commission. If there are any goods unsold the agent may return them or the principal may ask for them to be returned. No commission will be paid by the principal to the agent on those returned goods
Ok?
Sorry, incomplete answer! If goods stolen or damaged? Depends on insurance cover, agent / principle agreement, who caused the damage, how were they damaged, we’re they damaged in transit …..?
Too many potential questions giving rise to different answers. Sorry
Question 2. Matters for an auditor to consider when a client company breaks the law. Materiality? Likelihood of recurrence? Duty to disclose (public interest?)? Legal advice? Intentional or accidental? Management’s reaction when told of discovery? Duty to disclose combined with duty NOT to inform management? Who (which person or persons) within the client company is involved?
Quite a few matters to consider and I have absolutely no doubt that I could think of others. I bet you could too!
Question 3 non-material non-compliance? Construction of a small building on company property believing that planning permission had not been required. If this were a first offense, it’s likely that the local authority would not take corrective, punitive action in the form of a court case and monetary fines. At worst it’s possible that the company would be required to demolish the building
Q3. Can i say that as long as the non compliance is not material, it will have little imapct on the financial statements?
That’s pretty much what “non-compliance” means. Having said that, there are some amounts within Annual Reports that have to be CORRECT (rather than correct within material bounds)
Directors’ remuneration has to be RIGHT – not nearly right, nor close enough. It has to be right!
In the consignment stock when can we determine that the rewards and risks associated with the stock has passed to agent
In practice, look at the contract, discuss with management, see if any goods have ever been returned, look at subsequent events, review directors’ minutes ….
In the exam, the examiner will push you into reaching a decision that they want you to reach – it will be SO obvious that it is / isn’t consignment inventory
OK?
are there any notes for consignment accounts, worked examples etc, on opentuition.com?
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