Section 1: Subsidiary 1 – Carpets International (USA) Limited

You are involved in the audit of Carpets International (USA) Limited, a subsidiary company of Las Vegas Group Corporation (USA) Limited. The client has presented you with the following draft Statement of Financial Position and Statement of Financial Performance as follows:

Unaudited

11 months

30/11/X2

$’000

Audited

12 months

31/12/X1

$’000

Current Assets

Cash

58

73

Receivables

4579

3928

Inventories

3624

2047

Total Current Assets

8261

6048

Non-current Assets

Property, plant & equipment

28763

29417

Receivables

2000

2000

Total Non-current Assets

30763

31417

Total Assets

39024

37465

Current Liabilities

Bank borrowings – Secured

5000

7500

Trade Creditors

2500

2473

Provisions

643

610

Total Current Liabilities

8143

10583

Non-Current Liabilities

Bank borrowings – Secured

22000

20000

Provisions

547

510

Total Non-current Liabilities

22547

20510

Total Liabilities

30690

31093

Net Assets

8334

6372

Shareholders’ Equity

Share Capital

5000

5000

Accumulated Profits

3334

1372

Total Shareholders’ Equity

8334

6372

Statement of financial performance

Revenue

20007

19943

Gross profit

6702

4515

Operating expenses

3486

3047

Net Profit before tax

3216

1468

Taxation

1254

572

Net Profit after tax

1962

896

Accumulated profits at the beginning of the year

1372

476

Accumulated profits at the end of the period.

3334

1372

The following additional information is provided:

1. The company is a subsidiary of Las Vegas Group Corporation (USA) Limited which is listed on the New York Stock Exchange.

2. Your firm provides a clearance report to your firm’s Las Vegas Office as well as an audit report on the statutory accounts of the American subsidiary.

3. The company manufactures carpets. Approximately 80% of the company’s sales arise as a result of exports. Where the company sells abroad the customers are invoiced in the currency of that country.

4. The primary raw material used in the manufacture of the company’s product is wool which is purchased in Australia. You have been informed that the company’s profitability has improved due to the recent slump in wool prices.

5. With the exception of the managing director, Mr. L, an American executive, all of the local management is American. Mr. L is on a 5 year secondment from the US parent. He has a reputation for delivering results from subsidiaries which have not performed well in the past. It is his intention to return to the US Company in a year’s time as a director.

6. In the past you have found the financial controller, Mr. C, to be competent in day to day accounting issues but somewhat lacking in assessing the ‘broad picture’. Both management and statutory accounts are subject to Mr. L’s approval. He frequently insists on adjustments to the draft accounts.

7. The US parent’s management was dissatisfied with the company’s 19X1 result and has paid close attention to the company’s performance during 19X2.

8. The company operates a standard costing system and the finished goods inventory is valued at standard cost. Raw materials are valued at actual invoiced cost. Due to the Christmas shutdown no work in progress exists at year end.

9. During 19X2 production has been increased by 10% compared to 19X1 levels. This has resulted in favourable absorption variances which have contributed to the improved profitability during 19X2.

10. Tests on the company’s inventory and debtors controls in prior years have shown the system to be reliable. The systems are capable of producing reports on the ageing of inventory and debtors and the sales history of individual product lines.

11. Approximately 80% of the company’s trade debtors are overseas customers and the debt is denominated in foreign currency. Most of these customers are on 60 day credit terms.

12. Midway through the financial year the previous credit controller resigned. His replacement, Mr. B, was appointed 6 weeks later.

13. Mr. B has informed you that a number of customers have complained about product quality problems.

14. An analysis of the company’s fixed assets is a s follows:

19X2

$’000

Property – Factory building 27000

Plant & Equipment (including Vehicles) 1763

28763

Additions and disposals of fixed assets during 19X2 have not been significant.

The factory was acquired 6 years ago. Since that date no independent valuation has been carried out. Mr. L has assured you that the current market value of the property is not less than $27m.

15. Bank borrowings are secured by a fixed charge over the company’s buildings.

A loan repayment of $5m due on 30 November 19X2 was reduced to $500,000. Mr. L has stated that this was done with the agreement of the bank and that the bank is comfortable with the company’s performance, and points out that the company has made all of its interest payments on time.

16. The non-current receivables is an Export Market Development grant.

17. In prior years no serious differences between the auditors and management arose. The audit has always been completed on time and an unqualified opinion issued.

18. You have just received a memo from Las Vegas office stating that due to the client’s head office management’s desire to issue the results of the group earlier this year they will require clearance on the American company’s accounts by 18 January 19X3. For 19X1 clearance was given on 30 January 19X2.

You are required to complete the following:

A) Specify the analytical review procedures you consider should be carried out as part of your audit planning.

B) Identify what you consider to be the risk factors which will impact on the audit of receivables and inventories.

C) What other risk factors will impact on the audit.

D) Set the levels of materiality for your audit plan for the Statement of Financial Position and the Statement of Financial Performance. Justify the selection of these levels.

E) In respect of the following draft a memo to the audit partner setting out the audit approach to be adopted:

i) Receivables

ii) Inventory

iii) Land and Buildings – current value for disclosure.

</pclass=”msonormal”>



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *