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Hello Sir,
208 SITIA SPARKLE Kaplan 2020-21
Audit Risk
Sitia Sparkle Co purchases their goods
from suppliers in Africa and the goods
are in transit for up to three weeks.
At the year?end, there is a risk that the
cut?off of inventory, purchases and
payables may not be accurate and may
be under/overstated.I want to understand how the cutoff of the inventory and purchases will be affected by goods in transit for three weeks
and why not the prepayments of payables could be affected??thanks,
Cut-off is essentially commonsense “matching” in the correct accounting period.
Suppose the y/e is 31 Dec 2022.
If a company is not responsible for goods until they are received, inventory and purchase/liability should be recorded in the year in which the goods are received – 2022 if before the y/e or 2023 if after the y/e.If the company receives a purchase invoice and processes it in December (Dr Purchases/Cr Liability), it will also have to include the inventory amount as an asset (even if it hasn’t yet received the inventory).
If the company has received inventory before the y/e, but not yet the purchase invoice, it will have to make an accrual (Dr Purchases/Cr Accrual).
If it paid a supplier in advance for the goods, it must have an asset – if not inventory, then prepayment.
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