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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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Kack Ltd is a listed company that assembles domestic electrical goods which it then sells to both wholesale and retail customers. Kack Ltd’s management was disappointed in the company’s results for the year ended 31 March 2014. In an attempt to improve performance, the following measures were taken early in the year ended 31 March 2015:
Kack Ltd’s summarised financial statements for the year ended 31 March 2015 are set out below:
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2015
| Description | GHSm |
|---|---|
| Revenue (25% cash sales) | 4,000 |
| Cost of sales | (3,450) |
| Gross profit | 550 |
| Operating expenses | (370) |
| Operating profit | 180 |
| Profit on disposal of plant (note (i)) | 40 |
| Financial charges | (20) |
| Profit before tax | 200 |
| Income tax expense | (50) |
| Profit for the year | 150 |
STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2015
| Description | GHSm | GHSm |
|---|---|---|
| Non-current assets | ||
| Property, plant, and equipment (note (ii)) | 550 | |
| Current assets | ||
| Inventory | 250 | |
| Trade receivables | 360 | |
| Bank | nil | |
| Total current assets | 610 | |
| Total assets | 1,160 | |
| Equity and liabilities | ||
| Equity | ||
| Stated capital (400m shares) | 100 | |
| Income surplus | 380 | |
| Total equity | 480 | |
| Non-current liabilities | ||
| 8% loan notes | 200 | |
| Current liabilities | ||
| Bank overdraft | 10 | |
| Trade payables | 430 | |
| Current tax payables | 40 | |
| Total current liabilities | 480 | |
| Total equity and liabilities | 1,160 |
Below are ratios calculated for the year ended 31 March 2014:
Notes:
Required:
a) Calculate ratios for the year ended 31 March 2015 (showing your workings) for Kack Ltd, equivalent to those provided above.
(10 marks)
b) Analyse the financial performance and position of Kack Ltd for the year ended 31 March 2015 compared to the previous year.
(10 marks)
(Total: 20 marks)
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Ajara Ltd has two receivables that it has factored to a factoring agency, the GBB Bank, in return for immediate cash proceeds of less than the face value of the invoices for the year ended 31 December 2020. Both receivables are due from long-standing customers who are expected to pay in full and on time. In addition, Ajara Ltd has agreed to a three-month credit period with both customers.
Required:
Advise the directors of Ajara Ltd on the proper accounting treatment of the monies received under the terms of the two factoring arrangements in the financial statements for the year ended 31 December 2020 in accordance with IFRS 9: Financial Instruments.
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a) Nyinahini Ltd (Nyinahini) is a company reporting under IFRS. Nyinahini normally operates only within the country where its buildings are physically located. Recently, it entered into a contract to supply its products to a new client based in South Africa. All the work was completed in the period October to November 2018. The (fixed) contract price of 100 million Rand has been agreed upon as denominated in South African Rand. The full amount was invoiced on 1 December 2018 when the exchange rate was GH¢1 = 10.1889 Rand. The new client paid 50 million Rand in advance on 1 November 2018 when the exchange rate was GH¢1 = 9.9783 Rand. The balance will be paid in two equal instalments on 31 March 2019 and 30 June 2019. The exchange rate at 31 December 2018 was GH¢1 = 10.5037 Rand.
Nyinahini decided to eliminate exchange rate differences on the final two payments and entered into two forward rate agreements on 1 December 2018 to sell the appropriate amount of Rand on 31 March 2019 and 30 June 2019, and set up the relevant documentation to treat them as fair value hedges of the recognized receivables. At 31 December 2018, the two contracts for settlement on 31 March 2019 and 30 June 2019 were valued at GH¢148,000 collectively, as an asset from Nyinahini’s point of view.
Required:
Set out and discuss the accounting treatment of the above items, including relevant calculations, as the information provided permits, in the financial statements of Nyinahini for the year ended 31 December 2018.
(6 marks)
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b) Emefa Ltd (Emefa) is in the process of preparing its budget for the month of October 2019 for its product, YEK. The Company expects to sell the product for GH¢75 but this price is expected to increase in the last quarter of 2019 by 5%. The following are the expected sales in units for the last six months in 2019.
| Month | Units |
|---|---|
| August | 7,000 |
| September | 8,000 |
| October | 9,000 |
In October 2019, a total of 9,150 units of product YEK are expected to be produced to meet demand.
Typically, cash sales represent 20% of sales. Credit sales terms are 2/10, n/30. Emefa bills customers on the first day of the month following the month of sale. Experience has shown that 60% of the billings will be collected within the discount period, 25% by the end of the month after sales, 10% by the end of the second month after the sale, and 5% will ultimately be uncollectible. The firm writes off uncollectible accounts after 12 months.
The firm uses two materials for production, Mat and Pat. The purchase terms for materials are 2/15, n/60. Experience has shown that 80% of the purchases are paid in the month of the purchase and the remainder is paid in the month immediately following. In September 2019, the firm budgeted purchases were GH¢32,000 for Mat and GH¢20,000 for Pat.
The firm’s budgeted direct material and labour budgets are as follows:
Direct Materials Purchases Budget (in Cedis) For October 2019
| Material | Budgeted Purchases (Pounds) | Expected Purchase Price per Unit (GH¢) | Total (GH¢) |
|---|---|---|---|
| Mat | 45,000 | 2.00 | 90,000 |
| Pat | 25,000 | 3.00 | 75,000 |
| Total Budgeted Purchases | 165,000 |
The production process requires direct labour at two skill levels (SL). The rate for labour at the SL1 level is GH¢45 per hour and for the SL2 level is GH¢25 per hour. The SL1 level can process one batch of YEK per hour while SL2 uses two (2) hours for the same output. Each batch consists of ten (10) units. The manufacturing of YEK also requires one-fifth of an hour of SL2 workers’ time for each unit manufactured.
Variable manufacturing overhead is GH¢100 per batch plus GH¢75 per direct labour-hour. In addition to variable overhead, the firm has a monthly fixed factory overhead of GH¢60,000, of which GH¢18,000 is depreciation expense. The firm pays all manufacturing labour and factory overhead when incurred.
Total budgeted marketing, distribution, customer service, and administrative costs for the 2019 annual budget are GH¢3,000,000. Of this amount, GH¢2,000,000 is considered fixed and includes depreciation expense of GH¢400,000. All marketing and administrative costs are paid in the month incurred.
Management desires to maintain an end-of-month minimum cash balance of GH¢100,000. The firm has an agreement with a local bank to borrow its short-term needs in multiples of GH¢10,000 up to GH¢1,000,000 at an annual interest rate of 26%. Borrowings are assumed to occur at the end of the month. Bank borrowing at October 1 was GH¢0.
Required:
Prepare the cash budget for October 2019 for Emefa Ltd. (10 marks)
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Oliso Private Company Ltd has been operating in the manufacturing sector for over a decade. One of its major products is manufacturing equipment, which can reduce toxic emissions in the production of chemicals. The company recently employed a new marketing manager who introduced a series of marketing initiatives. This has resulted in significant growth of the company since the appointment of the marketing manager. One of the initiatives is the warranties that the company gives to its customers. The company guarantees its products for three years, and if problems arise within the period, it undertakes to fix them or provide a replacement for the product.
You are the Senior Manager recently engaged by Integrity Audit Consult responsible for Oliso Private Company Ltd’s audit. You are performing the final review as required by ISA 520 Analytical procedures for the audit and have come across the following issues.
Receivable balance due from Obey Company Ltd: Oliso Private Company Ltd has a material receivable balance due from a customer named Obey Company Ltd. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Obey Company Ltd for over eight months. Oliso Private Company Ltd however would not allow this balance to be included in the list of balances to be circulated. Instead, management has assured your team that they will provide a written representation confirming that the balance is recoverable.
Warranty provision: The warranty provision included in the statement of financial position is material. The audit team has performed testing over the calculations and assumptions, which are consistent with prior years. The team has requested a written representation from management confirming the basis and amount of the provision. Management is yet to confirm acceptance of the need to issue this representation.
Required:
a) Recommend THREE (3) audit procedures to validate the accounting estimates. (5 marks)
b) For each of the two issues above:
i) Evaluate the appropriateness of written representations as a form of audit evidence. (4 marks)
ii) Describe TWO (2) additional procedures the auditor should perform to conclude on the balances to be included in the financial statements. (6 marks)
c) The directors of Oliso Private Company Ltd have decided not to provide the audit firm with the written representation for the warranty provision as they feel it is unnecessary.
Required:
Explain the steps the auditor of Oliso Private Company Ltd should take to assess the impact of management’s refusal to provide a written representation on the auditor’s report. (5 marks)
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GGC Co. Ltd (GGCL) specializes in manufacturing equipment which can help to reduce toxic emissions in the production of chemicals. The company has grown rapidly over the past eight years, and this is partly due to the warranties that the company gives to its customers. It guarantees its products for five years, and if problems arise during this period, it undertakes to fix them or provide a replacement.
You are the manager responsible for the audit of GGCL, and you are performing the final review stage of the audit and have come across the following issues:
Receivable balance owing from Nhyira Co. Ltd
GGCL has a material receivable balance owed by its customer, Nhyira Co. Ltd. During the year-end audit, your team reviewed the aging of this balance and found that no payments had been received from Nhyira Co. Ltd for over six months. GGCL would not allow this balance to be circularized. Instead, management has assured your team that they will provide a written representation confirming that the balance is recoverable.
Warranty provision
The warranty provision included within the statement of financial position is material. The audit team has performed testing over the calculations and assumptions which are consistent with prior years. The team has requested a written representation from management confirming that the basis and amount of the provision are reasonable. Management is yet to confirm acceptance of this representation.
Required:
(Total: 20 marks)
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Gyidi Ltd sells goods on credit to most of its customers. In order to control its system of debt collection, the company maintains a sales ledger control account. The following information is available for the year ended 31 December 2020.
| Account | Amount (GHȼ) |
|---|---|
| Sales Ledger Control Account balance b/d 1 January 2020 | 88,200 (Debit) |
| Sales | 310,400 |
| Sales returns | 20,600 |
| Discounts allowed | 15,000 |
| Irrecoverable debts | 3,500 |
| Cheques received from customers | 292,040 |
| Dishonored cheques | 650 |
| Contra purchases ledger | 1,050 |
The schedule of receivables as at 31 December 2020 has also been provided as follows:
| Customer | Amount (GHȼ) |
|---|---|
| Kwaku Ansah | 14,200 |
| Adam Musah | 15,000 |
| Akua Afari | 22,800 |
| Naa Shikaa | 1,400 |
| Kofi Amosah | 8,600 |
| Total | 62,000 |
The sales Ledger Control Account balance did not agree with the total from the schedule of receivables. Subsequent investigations revealed the following errors: i) Cash received of GHȼ600 had been credited to Kwaku Ansah’s account as GHȼ60. ii) The discount allowed column in the cash book had been overstated by GHȼ960. iii) A sales return of GHȼ3,200 from Adam Musah was correctly recorded in Adam Musah’s account but had been omitted from the total in the Sales Returns Journal. iv) A credit sale of GHȼ4,000 to Kofi Amosah was correctly recorded in the Sales Journal but no entry had been made in Kofi Amosah’s account. v) A cheque received from Naa Shikaa for GHȼ2,430 correctly processed through the books had subsequently been dishonored. No entries have yet been made to record this dishonored cheque. vi) A credit sale of GHȼ5,200 had been made to Kwaku Ansah but no entries have yet been made to record this transaction. vii) Cash received of GHȼ300 had been debited to Kofi Amosah’s account. viii) No contra entry had been made in Akua Afari’s account in the Sales Ledger in respect of purchases by Gyidi Ltd from Akua Afari for goods with a list price of GHȼ750 less an 8% trade discount. This item has been correctly recorded in the Sales Ledger Control Account.
Required:
a) Prepare a revised Sales Ledger Control Account for the year ended 31 December 2020.
(9 marks)
b) Prepare a revised schedule of receivables as at 31 December 2020.
(7 marks)
c) Explain TWO (2) ways in which control accounts can be useful to businesses.
(4 marks)
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a) At the close of business on 31 July 2019, the following balances were extracted from the books of Kwabena Ltd, a limited liability company:
| Account | Amount (GH¢) |
|---|---|
| Receivables ledger control account | 47,600 |
| Payables ledger control account | 37,400 |
During the month of August, the following transactions occurred:
| Transaction | Amount (GH¢) |
|---|---|
| Cash received from customers | 31,800 |
| Cash paid to suppliers | 32,500 |
| Sales on credit | 48,200 |
| Purchases on credit | 36,500 |
| Sales returns | 1,900 |
| Purchase returns | 700 |
| Discounts received from suppliers | 400 |
| Settlement discount claimed by customer | 300 |
| Bad debts written off | 2,700 |
| Customer and supplier accounts settled by contra | 2,100 |
Required:
Prepare the receivables ledger control account and payables ledger control account for the month of August 2019 and hence determine the balances as at 31 August 2019.
(8 marks)
b) Makor, Degbe, and Sesenyo were in partnership sharing profits one-half, one-third, and one-sixth respectively. On 1 January 2019, they admitted Asinyo into the partnership on the following terms:
The Statement of Financial Position of the old firm as at 31 December 2018 was as follows:
Required:
i) Prepare the opening statement of financial position of the new firm as at 1 January 2019.
(6 marks)
ii) Prepare the capital accounts of the partners for the year to 31 December 2019.
(6 marks)
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a. A good working capital policy should facilitate successful achievement of the key short-term financing objectives of an organization.
Required:
Identify the three types of working capital policies of an organization. (5 marks)
b. This Way Ltd is preparing a business plan to apply for a grant from EDAIF for an expansion of its rice production. Current production is 20,000 bags at a variable cost per bag of GHS12.00 and contribution sales ratio is 25%. Variable cost is for purchases. Current receivable days is 30 days and inventory turnover is 12 times. Suppliers allow 15 days credit and the company maintains an absolute cash ratio of 1:1.
The funding support from EDAIF is expected to double the production capacity of the company. Inventory and absolute cash ratios would be maintained but receivables and payables days will increase to 45 days and 30 days respectively. EDAIF policy is to support only the extra working capital needs of applicants.
Required:
Determine the amount that should be applied from EDAIF. (10 marks)
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