Professional Documents
Culture Documents
COURSE:
COURSE ITEM:
DATE:
QUESTION ONE
(a) Meaning of the term inventory according to IAS 2 and how value of inventory can
be estimated according to this standard:
Meaning and valuation of inventory as per IAS 2:
Assets held for sale in the ordinary course of business [finished goods],
Assets in the production process for sale in the ordinary course of business [work
in process, and
Materials and supplies that are consumed in production [raw materials][IAS 2.6]
Value of inventory shall be measured at the lower of cost and net realizable value.
Net realizable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the
sale.
The cost of inventories shall comprise all costs of purchase, costs of conversion and
other costs incurred in bringing the inventories to their present location and
condition.
The cost of inventories shall be assigned by using the First-In, First-Out
(FIFO) or weighted average cost formula.
(b) Why audit of inventory is important for manufacturing firm compared to service
company and the reasons for this to be complex if auditor is not well prepared:
Audit of inventory for manufacturing firm compared to Service Company is
critically important considering the nature of activities of manufacturing firms
demanding holding large amount of inventory to support production produces a
different situation with service companies the latter usually do not hold
significant amount of inventory as in manufacturing firms.
Generally it is within manufacturing firms where auditors should expect to see all
three types of inventory namely finished goods, work in progress as well as raw
materials in support of production process.
With large amount of inventory there is high possibility of inventories being held
in different locations due to shortage of required space within a single location.
This means planning for and attendance by auditors to actual stocktaking exercise
has to take into account this possibility it adds the logistical and physical
movements demands for auditor and his team in terms of attending and actual
examination of actual stocktaking by staff of client company as required by ISA
501. Recall this standard demands that if inventory is material to the financial
statements the auditor shall obtain sufficient appropriate audit evidence regarding
1
In addition, the auditor follows up queries and notifies management and those charged
with governance of significant difficulties encountered during the stocktake.
In conclusion, the auditor considers whether attendance at the stocktake has provided
sufficient appropriate audit evidence in relation to relevant assertions principally
existence and, if not, the other procedures to be performed.
QUESTION TWO
(a) A comprehensive definition of non-current assets according to IAS 16
IAS 16, which deals with accounting for the tangible Non-current Assets uses special
term for this as Property, Plant and Equipment [PPE] a comprehensive definition of
PPE include the following:
Assets held by an enterprise for use in the production/supply of goods or services for
rental to others or for administrative purposes and are
Expected to be used during more than one accounting period thus the cost of the Noncurrent Assets is systematically allocated over its useful life through depreciation. Under
this definition the useful life of a fixed asset should be understood as:
The period of time over which an asset is expected to be used by the enterprise or the
number of production units or similar units expected to be obtained from the asset by the
enterprise.
(b) FOUR internal control procedures to be observed by auditor while auditing noncurrent assets
The high value of PPE in many companies makes it necessary to make separation of the
authorization, custody and record keeping functions especially important. Periodic
inspection of PPE is equally important. Consequently, the internal controls over PPE
would include the following:
Authorization - As PPE are likely to have a useful life over several years, their
acquisition and disposal will involve the enterprise in significant amounts of expenditure
and these should be authorized by Capital Budgets, BOD minutes and Capital
expenditure proposals
Recording Controls there are should be a PPE register which provides different details
for management of PPE like serial number, date of purchase, description and
manufacturer/Suppliers name, gross cost or valuation as well as estimated useful life.
Other details to be contained in PPE register include depreciation provided annually,
additions and disposals as well as accumulated depreciation. Furthermore the PPE
register would include details like Net Book Value [NBV], Estimated Residual Value,
summary of capitalized repairs, location of asset, estimated replacement cost and details
of eventual disposal. Beyond PPE register, nominal ledger accounting should also be kept
for cost, accumulated depreciation and for each type of asset.
Custodial Controls - The PPE of the company should not be susceptible to misuse and
should be protected from risk of loss by theft, premature obsolescence or destruction.
Custodial controls include having adequate insurance cover to provide against risk of
4
destruction, safe custody of movable assets e.g. motor cars, furniture, electronic
equipment, etc as well as physical security over the documents such as title records.
Managerial Supervision - there should be a suitable capitalization policy and this should
be used to monitor capital expenditure. Similarly there are should be budgetary control
useful for monitor capital expenditure as well as periodical verification process to
confirm the existence of PPE as shown in the records.
(c) Substantive audit tests with respect to audit of non-current assets or other items
along four major assertions can be presented in tabular format as follows:
Assertion
Existence
Completeness
Assertion
Rights/
Obligations
Issue
Valuation and
allocation
The
auditor
can
check
supporting
documentation such as purchase invoices/title
deeds/ loan documentation to ensure the
company does have title to assets. Board
minutes could also be reviewed to ensure that
title of the asset is assigned.
PPE should be held at NBV. All assets, except
land, should be depreciated. Revaluation is
permitted, but only for an entire class of assets.
QUESTION THREE
(a) List and brief description of common elements of standard audit report
- There are at least eight elements of audit report listed and described as follows:
1 Also too high disposal gain/loss
6
Title the title of the report should be clearly stated while differentiating audit report
with other types of reports usually prepared by management of Client Company. Simple
words like independent auditor or auditors report are usually used.
Addressee focuses on whom the audit report is primarily intended to normally those
who in the first place are seen as employing or in need of auditing and assurance
services. These are none but the owners or shareholders of a particular company thus
the report will identify them as shareholders or board of directors or supervisory
board.
Opening or introductory paragraph two issues are of particular important namely
the identification of the financial statements audited as well as a statement of the
responsibility of the entitys management and the responsibility of the auditor on these
statements. Key statements usually show clearly that it is the management of the
company that is responsible for preparing the audited FSs while the auditors duty is
limited to conducting the relevant audit work.
Scope paragraph this usually describes the nature of an audit engagement including
what actually auditor did in the audit engagement before arriving at giving relevant
audit opinion and must make reference to the ISAs or relevant national standards or
practices.
Opinion paragraph this contains expression of opinion on the financial statements
generally key terms used to express the auditors opinion are financial statements give a
true and fair view or present fairly, in all material respects, and mention the
framework used to arrive at that opinion in the context of Tanzania according to ISAs.
Date of the report the report must be dated and this date usually
coincides/corresponds with the date for which the audit work was completed - usually
the last date of field work. Auditor should not date the report earlier than the date on
which the financial statements are signed or approved by management.
Auditor's address this is none but a specific location, usually the city in which the
auditor maintains an office that serves the client audited where relevant it may mean
a city and country in which the audit report has been issued.
Auditors signature this refers to the name of the audit firm, or the personal name of
the auditor, or both, as appropriate. The auditors report is ordinarily signed in the
name of the firm because the firm assumes responsibility for the audit.