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“The estimate is made by the sales director; while this may be the best person to forecast sales they may not be the best person to predict returns. Returns are likely to be influenced more heavily by product quality, which the production or quality control manager may be better placed to predict. This implies that the forecast amount is based on simplistic, general estimates using sales levels rather than consideration of specific product quality issues.”
ma’am isn’t it too subjective to state who would be better at predicting sales returns? both are likely to downplay the sales returns. The production manager would be questioned for producing poor qlty products, if he gives a high(which is seemingly high but realistic estimate ) figure of returns. And of course sales director would want to keep the estimate for returns low, so that sales targets are met…
doubt 2: related to same section of question
examiner’s comments:
Part (c) related to the audit of a warranty provision. Candidates spent a lot of time discussing IAS 37 with only a minority correctly questioning why the warranty provision was decreasing when the revenues were actually increasing, thus the majority of candidates demonstrated a lack of professional scepticism.
based on the above paragraph I was wondering ma’am whether there is any direct correlation between warranty provision(for returns of goods) and revenue? and if so why is this expectation there?
doubt 3: related to same section of question
ma’am can we say that provision charged during the year should be roughly same as provisions utilised during the year(which provides an indicative figure)? so if the provision charged during the year are significantly higher than what was utilised then can we say that there is a chance of management manipulation/bias?
sincere apologies ma’am for bothering you so much, but trust me once am done with first reading of exam kit, I wont badger you with these many questions.
Noah098 wrote:“The estimate is made by the sales director; while this may be the best person to forecast sales they may not be the best person to predict returns. Returns are likely to be influenced more heavily by product quality, which the production or quality control manager may be better placed to predict. This implies that the forecast amount is based on simplistic, general estimates using sales levels rather than consideration of specific product quality issues.”
The exercise of professional scepticism does not mean that the auditor assumes that the client’s staff are dishonest. You could argue for the finance director if you preferred – the point is that the sales director is unlikely to be the best person.
Noah098 wrote:doubt 2: related to same section of question
That’s the whole point – the greater the volume of the sales – the greater the volume of returns under warranty.
Noah098 wrote:doubt 3: related to same section of question
Consider sales volume 1m, expected returns 1%, cost of repair $10 (I am making #s up – this is not meant to be specific to Osier) gives provision $100k. If this is opening provision but actual expense is only $90k, there is over-provision of $10k – this will “fall out” in the year’s expense. So if the closing provision is again $100k, the expense would be $90k.
But if sales doubled during the year, the closing provision should be $200k – making the expense for the year $190. You certainly can’t presume manipulation/bias without first considering what should be expected.
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