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question 1 – Valuation of WIP is carried out two weeks before the year end in this case study, why is this case? and would you not carry out valuation at the y/e date on 30/11/2008 so that the stocks figure are accurate and complete.
it states on the solutions that the risk is due to the gap between the valuation and the year end date. – we can reduce this risk by do stock at year end to reduce the under/over valued stocks?
Also in solutions is says ” important for the auditors to assess that the calculations of completeness and the absorption of overheads and other costs such as labour has been carried out consistently with prior years and that the roll forward has been carried out correctly.”
why would an expense be roll over to the next year? I would understand that creditors/debtors would be carried over to next year but not an expense. Am I missing out something or misunderstood the solutions.Why value wip 2 weeks before the year end? Maybe it was convenient to do it then. Maybe wip doesn’t vary from day to day / week to week? If its a continuous production facility the value of wip on any one day could well be almost exactly the same as the previous or the following days
If, in fact, wip DOES vary from day to day / week to week then, sure, let’s have a reassessment as at the year end to reduce the risk of over- or under-valuation of inventory
Where inventory is valued on an absorption cost basis, the values of wip include an element of direct and indirect costs as well as an element of fixed costs. The inclusion of an element of expenditure within the closing inventory is the reason why there is a carry forward of that expense into the following year.
You say that you cannot understand the concept of expenses being carried forward. What about prepaid rent expense? Prepaid insurance or road tax? Prepaid advertising? Open your mind, Kerri!
continue from the post above:
Warranty provision – if the sales have increased then the warranty provision may be significantly higher due to guarantees etc from customers. the CEO estimates the warranty provision, hence he will try to make the SOFP look better. therefore the warranty provision will be understated – is this correct?
it also says in solutions: ” auditors must ensure that the provision is calculated consistency in pervious years” – would this be a matter of the auditor testing its opening balances and make sure the provision figure is applied correctly.
“Guarantees from customers”? A warranty is where a company warrants that their product will continue to work satisfactorily for a period of years. It’s a liability of the company, not a liability of the customers!
You would expect that an increase in revenue would lead to an increase in the provision required.
You are basically correct in that, in an attempt to improve the view of the statement of financial position, it could well be that the directors have been tempted to underestimate the level of the provision required
The element of consistency in the application of the calculation of the provision is a relatively straight-forward exercise. We know from our audit notes from last and previous years what the company’s policy is with reference to the calculation of the warranty provision. We now need to ensure that that policy has been consistently applied this year. And then we can actually reperform the calculation. And we can see that the figure for revenue has been correctly derived. And you can get the directors to confirm by written representations that they believe that the provision has been correctly calculated and the policy has been consistently applied
But that’s pretty much the extent of what you need do
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