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Your firm was recently appointed the statutory auditors of Foodys, a limited liability company in Nigeria, for the year ended December 31, 2015. The previous auditors, from whom your firm has received professional clearance, did not wish to be re-appointed as auditors.
The principal activities of the company are the distribution and retail of fine Spanish food products. All products are imported from suppliers based in Spain and delivered to Foodys’s central warehouse in the southwest of Nigeria. The company has its own retail outlets but also supplies national supermarket chains and small independent retailers in Nigeria. Sales through Foodys’s retail outlets are on a cash basis, and sales to supermarkets and independent retailers are on credit basis.
The company maintains computerised records for inventories held at the distribution centre and retail outlets. The inventory records are supported by continuous counting procedures, and as a result, the company does not undertake a physical count at the year end.
Foodys’s retail outlets are equipped with computerised tills. As each sale is recorded, the computer updates the quantity sold and the inventory balance. The manager at each outlet is responsible for banking the takings on a daily basis.
During the year, the company engaged consultants to design and implement the company’s new website with online ordering facilities. Under the terms of the contract, the website was scheduled to be operational by the end of September 2015 in order to take advantage of the high seasonal demand at this time of the year. Due to technical problems, the website was not launched until the end of November 2015. The consultants have been paid in full for their work. However, the company has commenced legal proceedings for breach of contract.
Despite failing to meet its sales targets in respect of online sales, the management accounts for the 11 months to November 30, 2015, indicate an increase in sales revenue of 12% compared with the same period in 2014. Inventory and receivables balances are significantly higher than the previous year as a result of the increased level of activity.
Management is planning to expand the retail activities of the business by opening additional retail outlets. It is hoping to fund the expansion with a bank loan and has approached the company’s bankers to provide the funding. The bankers require the audited financial statements before making a decision. Management is keen to have the funding in place to progress with the expansion and would like to have the audit completed by February 28, 2016.
(a) Identify the key business risks from the circumstances described above.
(b) List the factors which have led you to identify that risk.
(c) Outline the audit work you would perform to address the risk.
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WXYZ is preparing for the first half of the next year. The following information was available:
a. Sales – 15% of monthly sales are in cash, while the balance is sold on credit. Collections from receivables are 50% in the first month after sales, 30% in the second month, and the balance in the third month after sales.
b. Purchases are usually 55% of sales and paid in the month of purchase.
c. Insurance company is expected to pay the sum of N525,000 in February based on the company’s accidented vehicles.
d. Salary deductions are paid on a preceding-month basis.
e. Company income tax of N475,550 will be paid in March.
f. Cash and cash equivalent balance as at December is N502,760.
g. Bank charges are 1% of total payments for the month.
h. Additional Information:
| Month | October (N) | November (N) | December (N) | January (N) | February (N) | March (N) |
|---|---|---|---|---|---|---|
| Sales | 750,000 | 600,000 | 850,000 | 520,000 | 670,000 | 800,000 |
| Net Salaries | 230,000 | 200,000 | 250,000 | 210,000 | 240,000 | 270,000 |
| Other Expenses | 200,700 | 187,500 | 197,500 | 177,200 | 187,500 | 192,700 |
| Salaries Deductions | 29,400 | 28,400 | 39,400 | 28,700 | 32,750 | 27,650 |
Required:
Prepare the cash budget for the first three months of the year. (Total 20 Marks)
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Mega Laboratories plc is a successful manufacturing company in the pharmaceutical industry. The company manufactures a number of household drugs. Since the advent of the Covid-2019 pandemic, its products have been in high demand. One of its newest products is known as vacineDcovid. In order to manufacture the product, a single raw material, Zithromax, is used.
Budgets are to be prepared for the quarter ending 30 June 2021, and the following information is available for this purpose:
(i) At 31 March 2021 various balances were as follows:
(ii) Extracts from the ‘standard cost card’ – vacineDcovid are as follows:
(iii) Suppliers of Zithromax give two months credit to the company, whereas customers take one month’s credit.
(iv) Sales expectations for the quarter ending 30 June 2021 are as follows:
(ix) Assume there is no work-in-progress and that stocks of vacineDcovid and Zithromax are valued at standard direct cost – see (ii) above.
Required:
For the quarter ending 30 June 2021 prepare:
a. A cash budget (amounts for each separate month are not required). (8 Marks)
b. Income Statement budget (clearly state any assumptions you have made). (5 Marks)
c. Briefly state the benefits of a Cash Budget to Mega Laboratories plc. (3 Marks)
d. Sales are often considered to be a principal budget factor of an organisation. Explain the meaning of a ‘principal budget factor’ and assuming that it is sales, explain how sales may be forecast, making appropriate reference to the use of statistical techniques and the use of computers. (4 Marks)
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Given opening account receivables of N2,300,000, revenue of N9,600,000, and receipts from customers of N9,000,000, the closing account receivables balance should be:
A. N1,700,000
B. N2,900,000
C. N3,700,000
D. N12,700,000
E. N16,300,000
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Where a specific trade receivable is written off as bad, the corresponding credit is expected to be in
A. Purchases Account
B. Bad Debts Account
C. Allowance for Doubtful Debts Account
D. Sales Account
E. Receivables Ledger Control Account
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In the course of an audit assignment, an auditor requires an independent and external confirmation for the following items:
You are required to:
a. Justify the need for confirmation in respect of the items listed above. (9 Marks)
b. State the contents of each of the letters sent to request for confirmation in TWO of the items stated above. (6 Marks)
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Grandkano Nig. Plc. is a company listed on the Nigerian Stock Exchange (NSE) and located in the northwestern part of the country. The company has been paying yearly penalties to NSE in respect of non-disclosure of related party transactions in its published financial statements. The company has therefore approached a partner in your firm to assist in this regard in order to avoid payment of these yearly penalties. The partner in your firm has requested for a list of all transactions with parties connected with the company and the directors of the company provided the following summary:
(i) A factory building had been sold to the brother of Alhaji Nagode, the Managing Director of Grandkano Nig. Plc. for N300 million (net of selling cost of N5 million). The market value of the property (factory building) was N322.5 million. The carrying amount of the factory building was N375 million and its value in use was N270 million.
(ii) Every month Grandkano Nig. Plc. sells N750,000 worth of goods to Malam Bayero, the finance director. The finance director has set up a small retail business for his son (Dongoyaro), and the goods are sold at cost price to him. The annual turnover of Grandkano Nig. Plc. is N4.5 billion. Also, Malam Bayero has purchased his official company’s car from the company for N675,000 (market value N1.2 million). Malam Bayero earns a salary of N7.5 million per annum, and he is a very wealthy man.
Required:
a. Reasons why it is important to disclose related party transactions. (5 Marks)
b. The nature of any disclosures required in transactions (i) and (ii) above under IAS 24 related party disclosures. (10 Marks)
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Which of the following items is NOT expected to be found on the credit side of a receivable ledger control account?
A. Cash received from customers
B. Value of goods returned by customers
C. Decrease in allowance for receivables
D. Discount allowed
E. Customers’ debt written-off
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Holy Family Limited is a trading company that deals in furniture. The company is a major distributor to Happy Couples Limited that manufactures the furniture. The turnover of the company as at December 31, 2017, was ₦120,000,000. Also, in the statement of financial position is a figure of ₦2,500,000 that represents trade receivables. The auditor informs the Managing Director of the need to circularize the debtors. The Managing Director feels indifferent to circularization, saying that the figure of ₦2,500,000 is not material with a turnover of ₦120,000,000.
Required:
a. As an auditor, explain to the Managing Director the concept of materiality in accordance with ISA 320.
(5 Marks)
b. State the steps you are expected to take as regards materiality when planning and performing an audit.
(5 Marks)
c. Explain to him why you should confirm receivable balances through circularization.
(3 Marks)
d. If you decide to circularize only a sample of receivables, list the types of accounts that should not be overlooked in selecting the sample.
(7 Marks)
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Find Related Questions by Tags, levels, etc.
Your firm was recently appointed the statutory auditors of Foodys, a limited liability company in Nigeria, for the year ended December 31, 2015. The previous auditors, from whom your firm has received professional clearance, did not wish to be re-appointed as auditors.
The principal activities of the company are the distribution and retail of fine Spanish food products. All products are imported from suppliers based in Spain and delivered to Foodys’s central warehouse in the southwest of Nigeria. The company has its own retail outlets but also supplies national supermarket chains and small independent retailers in Nigeria. Sales through Foodys’s retail outlets are on a cash basis, and sales to supermarkets and independent retailers are on credit basis.
The company maintains computerised records for inventories held at the distribution centre and retail outlets. The inventory records are supported by continuous counting procedures, and as a result, the company does not undertake a physical count at the year end.
Foodys’s retail outlets are equipped with computerised tills. As each sale is recorded, the computer updates the quantity sold and the inventory balance. The manager at each outlet is responsible for banking the takings on a daily basis.
During the year, the company engaged consultants to design and implement the company’s new website with online ordering facilities. Under the terms of the contract, the website was scheduled to be operational by the end of September 2015 in order to take advantage of the high seasonal demand at this time of the year. Due to technical problems, the website was not launched until the end of November 2015. The consultants have been paid in full for their work. However, the company has commenced legal proceedings for breach of contract.
Despite failing to meet its sales targets in respect of online sales, the management accounts for the 11 months to November 30, 2015, indicate an increase in sales revenue of 12% compared with the same period in 2014. Inventory and receivables balances are significantly higher than the previous year as a result of the increased level of activity.
Management is planning to expand the retail activities of the business by opening additional retail outlets. It is hoping to fund the expansion with a bank loan and has approached the company’s bankers to provide the funding. The bankers require the audited financial statements before making a decision. Management is keen to have the funding in place to progress with the expansion and would like to have the audit completed by February 28, 2016.
(a) Identify the key business risks from the circumstances described above.
(b) List the factors which have led you to identify that risk.
(c) Outline the audit work you would perform to address the risk.
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WXYZ is preparing for the first half of the next year. The following information was available:
a. Sales – 15% of monthly sales are in cash, while the balance is sold on credit. Collections from receivables are 50% in the first month after sales, 30% in the second month, and the balance in the third month after sales.
b. Purchases are usually 55% of sales and paid in the month of purchase.
c. Insurance company is expected to pay the sum of N525,000 in February based on the company’s accidented vehicles.
d. Salary deductions are paid on a preceding-month basis.
e. Company income tax of N475,550 will be paid in March.
f. Cash and cash equivalent balance as at December is N502,760.
g. Bank charges are 1% of total payments for the month.
h. Additional Information:
| Month | October (N) | November (N) | December (N) | January (N) | February (N) | March (N) |
|---|---|---|---|---|---|---|
| Sales | 750,000 | 600,000 | 850,000 | 520,000 | 670,000 | 800,000 |
| Net Salaries | 230,000 | 200,000 | 250,000 | 210,000 | 240,000 | 270,000 |
| Other Expenses | 200,700 | 187,500 | 197,500 | 177,200 | 187,500 | 192,700 |
| Salaries Deductions | 29,400 | 28,400 | 39,400 | 28,700 | 32,750 | 27,650 |
Required:
Prepare the cash budget for the first three months of the year. (Total 20 Marks)
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Mega Laboratories plc is a successful manufacturing company in the pharmaceutical industry. The company manufactures a number of household drugs. Since the advent of the Covid-2019 pandemic, its products have been in high demand. One of its newest products is known as vacineDcovid. In order to manufacture the product, a single raw material, Zithromax, is used.
Budgets are to be prepared for the quarter ending 30 June 2021, and the following information is available for this purpose:
(i) At 31 March 2021 various balances were as follows:
(ii) Extracts from the ‘standard cost card’ – vacineDcovid are as follows:
(iii) Suppliers of Zithromax give two months credit to the company, whereas customers take one month’s credit.
(iv) Sales expectations for the quarter ending 30 June 2021 are as follows:
(ix) Assume there is no work-in-progress and that stocks of vacineDcovid and Zithromax are valued at standard direct cost – see (ii) above.
Required:
For the quarter ending 30 June 2021 prepare:
a. A cash budget (amounts for each separate month are not required). (8 Marks)
b. Income Statement budget (clearly state any assumptions you have made). (5 Marks)
c. Briefly state the benefits of a Cash Budget to Mega Laboratories plc. (3 Marks)
d. Sales are often considered to be a principal budget factor of an organisation. Explain the meaning of a ‘principal budget factor’ and assuming that it is sales, explain how sales may be forecast, making appropriate reference to the use of statistical techniques and the use of computers. (4 Marks)
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Given opening account receivables of N2,300,000, revenue of N9,600,000, and receipts from customers of N9,000,000, the closing account receivables balance should be:
A. N1,700,000
B. N2,900,000
C. N3,700,000
D. N12,700,000
E. N16,300,000
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Where a specific trade receivable is written off as bad, the corresponding credit is expected to be in
A. Purchases Account
B. Bad Debts Account
C. Allowance for Doubtful Debts Account
D. Sales Account
E. Receivables Ledger Control Account
Find Related Questions by Tags, levels, etc.
In the course of an audit assignment, an auditor requires an independent and external confirmation for the following items:
You are required to:
a. Justify the need for confirmation in respect of the items listed above. (9 Marks)
b. State the contents of each of the letters sent to request for confirmation in TWO of the items stated above. (6 Marks)
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Grandkano Nig. Plc. is a company listed on the Nigerian Stock Exchange (NSE) and located in the northwestern part of the country. The company has been paying yearly penalties to NSE in respect of non-disclosure of related party transactions in its published financial statements. The company has therefore approached a partner in your firm to assist in this regard in order to avoid payment of these yearly penalties. The partner in your firm has requested for a list of all transactions with parties connected with the company and the directors of the company provided the following summary:
(i) A factory building had been sold to the brother of Alhaji Nagode, the Managing Director of Grandkano Nig. Plc. for N300 million (net of selling cost of N5 million). The market value of the property (factory building) was N322.5 million. The carrying amount of the factory building was N375 million and its value in use was N270 million.
(ii) Every month Grandkano Nig. Plc. sells N750,000 worth of goods to Malam Bayero, the finance director. The finance director has set up a small retail business for his son (Dongoyaro), and the goods are sold at cost price to him. The annual turnover of Grandkano Nig. Plc. is N4.5 billion. Also, Malam Bayero has purchased his official company’s car from the company for N675,000 (market value N1.2 million). Malam Bayero earns a salary of N7.5 million per annum, and he is a very wealthy man.
Required:
a. Reasons why it is important to disclose related party transactions. (5 Marks)
b. The nature of any disclosures required in transactions (i) and (ii) above under IAS 24 related party disclosures. (10 Marks)
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Which of the following items is NOT expected to be found on the credit side of a receivable ledger control account?
A. Cash received from customers
B. Value of goods returned by customers
C. Decrease in allowance for receivables
D. Discount allowed
E. Customers’ debt written-off
Find Related Questions by Tags, levels, etc.
Holy Family Limited is a trading company that deals in furniture. The company is a major distributor to Happy Couples Limited that manufactures the furniture. The turnover of the company as at December 31, 2017, was ₦120,000,000. Also, in the statement of financial position is a figure of ₦2,500,000 that represents trade receivables. The auditor informs the Managing Director of the need to circularize the debtors. The Managing Director feels indifferent to circularization, saying that the figure of ₦2,500,000 is not material with a turnover of ₦120,000,000.
Required:
a. As an auditor, explain to the Managing Director the concept of materiality in accordance with ISA 320.
(5 Marks)
b. State the steps you are expected to take as regards materiality when planning and performing an audit.
(5 Marks)
c. Explain to him why you should confirm receivable balances through circularization.
(3 Marks)
d. If you decide to circularize only a sample of receivables, list the types of accounts that should not be overlooked in selecting the sample.
(7 Marks)
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