Case Solution Chapter 12

CASE SOLUTION

Auditing 2 SECTION 12 Completing the Audit, Reporting to Management, and External Reporting



Arranged by : Alan Alan Budi Budi Kusu Kusuma ma

(010 (01031 3118 1814 1419 1925 259) 9)

Annisa Kurnia Sari

(01031281419105) (01031281419 105)

Sindi Selvia !tariani (01031281419123) "uri!a #as$ia (0103118141903%) (0103 118141903%)

ACCOUNTIN! "E#ARTEMENT ECONOM$ %ACULT$ SRI&I'A$A SRI&I'A$A UNI(ERSIT$ UNI(ERSI T$

2)1*

Ca+e 121 &ye'a *r$*rati*n &valuati*n *+ Audit ,i++eren-es INTRO"UCTION

.

&yema #as debt agreement ass*-iated /it $ubli-ly traded b*nds tat reuire audited

. .

+inan-ial Statement e 'anagement aving +inan-ial statement $re$ared in a--**rdan-e /it AA Audit +ield/*r! as been -*m$leted but several items as been $*sted t* summary *+

.

unadusted 'isstatement6 An audit*r s*uld -are+ully -*nsider materiality be-ause audit*r d* n*t reuire teir -lient t* b**! immaterial adustment6

-AC.!ROUN" •

•

7ature + lients Business . &ye ma is engaged reaear- and devel*$ment manu+a-ture and sale *+ medi-al . .

devi-es +*r eyes surgeries6 ayne arrut as a +*under !ee$ ma!e eyema gr*/n6 &yema is -urrently te tird largest su$$lier *+ *$ti-al eui$ment /it a 25

.

$er-ent mar!et sare and em$l*ys 425 $e*$le6 30 ; st*-! *+ eyema is */ned by te +*under and +amily 40 ; is */ned by

-*m$any em$l*yees te rest st*-! */ned by venture -a$italist and invest*r6 A--*unting &nvir*nmnet
business and te +ive -ler! ave limited training and e$erien-e6 e A--*unting de$artement as n*t !e$t $a-e /it te demand -reated by gr*/t

.

in $r*du-ti*n and sales6 =n audit $lanning te inerent ris! and -*ntr*l ris! /ere assessed at less tan te maimum but audit still using substantive test6

•

'anagements *siti*n turn ar*und e++r-t +r*m it6 . e audit re$*rt al/ays dated be+*re te end +ebruary but tis year +ield/*r! at .

eyema /as n*t -*m$leted /it n* $ri*r n*ti+i-ati*n t* te audit*r te -*m$any $r*vided sare*lders and

.

-redit*rs /it $reliminary earning in+*rmati*n in te last /ee! *+ +ebruary6 =n te middle *+ mar- te $resident tend t* minimi?e te adusment *+ +inan-ial statement

. •

e managing $artener *+ auditing *++i-e tat ad been n*ti+ied se agree tat te

team s*uld n*t d* te adustment but te +irm s*uld $ra-ti-e te audit standard6 'ateriality . *tal materiality /as set at @26000 tis am*unt is eual t* a$$r*imately 5; *+ . .

earning be+*re taes6 er+*rman-e materiality +*r eyema is set t* %5; *+ *verall materiality A--*rding t* +irm $*li-y t*lerable misstatement +*r any *ne +inan-ial statement a--*unt -ann*t e-eed $er+*rman-e materiality

MISSTATEMENT #OSTE" TO T/E SUMMAR$ O% UNA"'USTE" MISSTATEMENT •

All te item $*sted t* te summary *+ undusted misstatement ave been dis-ussed /it te -lient and te -lient agrees /it audit*r te -lient $re+er n*t t* b**! any *+ te items in te +is-al year under audit 16 arranty &$ense  Cnderstated by @1306000 be-ause *+ te -ange in /arranty in /arranty $*li-y analysis *+ /arranty re$air and re$la-ement data su$$*rt a @1306000 additi*n t* te /aranty e$ense estimate +*r te -urrent year6 26
RE0UIRE"  A++ume that ou are the auditor re+pon+i3le 4or the EeMax audit It i+ no5 Mar6h 7), and all planned 4ield5or8 ha+ 3een 6ompleted Re6all that total o9erall 4inan6ial +tatement materialit ha+ 3een +et at :;2<,))) and tolera3le mi+tatement i+ +et e=ual to per4orman6e materialit, 5hi6h i+ *<> o4 o9erall materialit Ta8ing into a66ount the in4ormation pro9ided, plea+e an+5er the 4ollo5ing =ue+tion ?1@ &hi6h o4 the 4ollo5ing three alternati9e+ 3e+t de+6ri3e+ the 6ondition+ under 5hi6h ou 5ould i++ue a 6lean opinion 4or EeMax aB I 5ould not 3e 5illing to i++ue a 6lean opinion e9en i4 EeMax i+ 5illing to ma8e

adu+tment+

4or

item+

on

the

Summar

o4

Unadu+ted

Mi++tatement+ 3B I 5ould 3e 5illing to i++ue a 6lean opinion 5ithout an adu+tment+ 6B I 5ould 3e 5illing to i++ue a 6lean opinion onl i4 EeMax i+ 5illing to ma8e +ome adu+tment+ to their 4inan6ial +tatement+ 4or item+ on the Summar o4 Unadu+ted Mi++tatement

Brie+ly e$lain y*ur -*i-e E

As an audit*r = /ill -**se te - *$ti*n be-ause based *n =nternati*nal audit standard auditor’s reponsibilites is to express an opinion on these financial statement based on audit in accoordance with international Standard on Auditing. Those standards requiare that the comply with the ethical requirements and plan and perform the audit obtain reasonable assurance about the whether the financial statement are free from material misstatement. =n tis -ase te

+irm didnt a$$ly te adustment6 * release te -lean *$ini*n te audit*r s*uld $er+*rm te reas*nable assuran-e ab*ut te +inan-ial statement su- as E e audit eviden-e is -*m$lete +ul+ill tree general audit standard and n* material un-ertainties6 'ean/ile te materiality a$$ened in +*ur a--*unt /it*ut any adustment6 is is /ill -aused te integrity and inde$enden-y

and re$*nsibilites *+ audit*r ( based *n internati*nal audit standard) are

uesti*nable i+ tey still releasing te -lean *$ini*n6 Fr*m te +irm $ers$e-tive  te +inan-ial statement /ill s*/n te in-*rre-t in+*rmati*n by still using ab*ut *verstated and undestated a--*unt te +irm /*uldnt !n*/ */ mu- teir e$ense s*uld be $aid and */ mu- te re-eiveble tat tey s*uld re-ieve be-ause *+ te misstatement  S* tats /y te +irm s*uld ma!e adustment ten te audit*r and team -*uld ma!e -lean *$ini*n /it*ut -*llide te standard and eti-6 ?2@ I4 ou +ele6ted option+ Da or D3 in =ue+tion 1, a++ume no5 that the 6lient ha+ de6ided that the 5ill ma8e an adu+tment o4 up to :2<),))) to their 4inan6ial +tatement+ #lea+e de6ompo+e the total adu+tment ou 5ould re6ommend into the indi9idual a66ount 6la++i4i6ation+ in6luded on the Summar o4 Unadu+ted Mi++tatement+ in the +pa6e pro9ided 3elo5 Feg, 5hat adu+tment 5ould ou re=uire 4or 5arrant expen+e, repair and maintenan6e expen+e, et6 The dollar 9alue+ o4 our indi9idual a66ount adu+tment+ +hould +um to no more than :2<),)))B I4 ou +ele6ted item D6 in =ue+tion 1, 5hat i+ the minimum total adu+tment that ou 5ould re=uire 3e4ore i++uing a 6lean opinion : GGGGGGGGGGGGGGG #lea+e de6ompo+e thi+ total adu+tment into the indi9idual a66ount 6la++i4i6ation+ in6luded on the Summar o4 Unadu+ted Mi++tatement+ in the +pa6e pro9ided 3elo5 Feg, 5hat adu+tment, i4 an, 5ould ou re=uire 4or 5arrant expen+e, repair and maintenan6e expen+e, et6 The dollar 9alue+ o4 our indi9idual a66ount adu+tment+ +hould +um to our re=uired minimum adu+tmentB &arrant expen+e Repair and maintenan6e expen+e Litigation expen+e

A66ount+ Re6ei9a3le+HSale+ Total

lease brie+ly e$lain y*ur de-isi*ns: e aggregati*n *+ !n*/n n*n.sam$ling misstatement and $r*e-ted sam$ling misstatement is less tan 2; bel*/ matriality6 us an adustment *+ ar*und @310000 -an be usti+ied6 Assuming te audit*r -**ses n*t t* in-rease teir a--e$table audit ris! *r materiality and assuming te audit*r -**ses t* n*t -*ndu-t any additi*nal tests ten te t*tal adustment t* te +inan-ial statements migt be -*m$rised *+ te +*ll*/ing -*m$*nents:

200000

arranty e$ense

%0000

A--*unts re-eivablesGsales

40000 H

*tal

@310000

Ca+e 122 Aut* arts =n-6 *nsidering 'ateriality en &valuating A--*unting *li-ies and F**tn*te ,is-l*sures -AC.!ROUN"

.

Aut* arts =n-6 (e *m$any) manu+a-tures aut*m*bile subassemblies mar!eted $rimarily t* te Ibig treeJ CS aut*ma!ers6

The unaudited 4inan6ial +tatement+ 4or

The unaudited 4inan6ial +tatement+ 4or

the ended "e6em3er 71, 2)1 *tal Assets @5 milli*n

the ended "e6em3er 71, 2)17 *tal Assets @4% milli*n

*tal
*tal
re a =n-*me @ milli*n

re a =n-*me @5 milli*n

.

&arnings $er sare ave in-reased steadily *ver $ast +ive years /it -umulative return

.

*+ 140; *ver te $eri*d6 ,uring 2014 te *m$any signi+i-antly e$anded its $lant and +ied asset6 e

.

*m$any $ur-ased @163306000 *+ t**ling su$$lies6 =n 2013 te *m$any e$ensed t**ling su$$lies6 #*/ever at te beginning *+ 2014 te -*ntr*ller and F determined te -a$itali?ati*n *+ t**ling su$$lies /*uld be te $re+erable a--*unting met*d6 The Compan 6hanged it+ a66ounting poli6 a66ordingl and 3egan to in6lude the tooling +upplie+ in Dother 6urrent a++et+ until the +upplie+ are pla6ed into +er9i6e, at 5hi6h time the Compan enter+ a ournal entr to remo9e the a++et+ and re6ord the 6o+t+ o4 the u+ed +upplie+ a+ the

.

expen+e ,uring 2013 t**ling e$ense is @506000 and eld a$$r*imately @356000 *+ t**ling

su$$lies *n and at year.end6 e *n.and su$$lies /ere n*t in-luded in assets *n Aut* arts balan-e seet at 31 ,e-ember 20136 =n 2014 te *m$any used @160006000 *+ t**ling su$$lies (in additi*n t* te a$$r*imately @356000 *n and at te beginning *+ .

te year B e unaudited +inan-ial statements +*r te year ended ,e-ember 31 2014 re+le-t @160006000 *+ t**ling e$ense *n te in-*me statement and @3306000 *+ t**ling su$$lies as -urrent assets *n te balan-e seet6 e a$$r*imately @356000 *+ t**ling su$$lies *n and at te end *+ last year /ere n*t in-luded in te @160006000 t**ling e$ense re-*rded in 2014 be-ause t*se -*sts /ere e$ensed in 2013 under te *ld a--*unting $*li-y6

0UESTION AN" ANS&ERJ 1 "e+6ri3e 5hether ou agree that 6apitaliKation o4 the tooling +upplie+ i+ the pre4era3le method o4 a66ounting 4or Auto #art+, In6 e agree /it te management -*i-e t* -ange te a--*unting $*li-y -aused its still

a$$r*$riate -anging6 Based *n =AS 8 A--*unting *li-ies anges in A--*unting

&stimates and &rr*rs an entity is $ermitted t* -ange an a--*unting $*li-y i+ te -ange: . =s reuired by a standard *r inter$retati*nE *r .
teir si?e *r nature individually *r -*lle-tively in+luen-e te e-*n*mi- de-isi*ns *+ users ta!en *n te basis *+ te +inan-ial statements6 #*/ d* audit*rs devel*$ an estimates materiality Audit*r needs $r*+essi*nal udgment +*r tat6 Audit*rs /ill +*ll*/ te $*li-ies and $r*-edure t* assess te materiality6 *nsider t* 'essier te rate *+ materiality is 3.5 $er-ent *+ $re ta in-*me6 #*/ever te assessment *+ .

materiality di++erent +r*m *ne -lient t* *ter -lient6 F*r Aut* arts =n-6 Assume i+ /e used 5; *+ materiality rate te am*unt *+

.

materiality is 5;  $re ta in-*me 5;  @  milli*n  @ 3006000 S* te estimati*n *+ +inan-ial statement materiality is @ 30060006 "es tere are ualitative +a-t*r im$a-t te materiality de-isi*n6 Based *n Auditing Standard 7*6 146 e audit*r s*uld evaluate /eter un-*rre-ted misstatements are material individually *r in -*mbinati*n /it *ter misstatements6 =n ma!ing tis evaluati*n te audit*r s*uld evaluate te misstatements in relati*n t* te s$e-i+i- a--*unts and dis-l*sures inv*lved and t* te +inan-ial statements as a

/*le ta!ing int* a--*unt relevant uantitative and ualitative +a-t*rs6 Lualitative +a-t*rs t* -*nsider in te audit*rMs evaluati*n *+ te materiality *+ un-*rre-ted misstatements i+ relevant in-lude te +*ll*/ing: a6 e $*tential e++e-t *+ te misstatement *n trends es$e-ially trends in $r*+itability6 b6 e e++e-ts *+ mis-lassi+i-ati*ns +*r eam$le mis-lassi+i-ati*n bet/een *$erating and n*n.*$erating in-*me *r re-urring and n*n.re-urring in-*me items6 -6 e li!eli**d tat a misstatement tat is -urrently immaterial may ave a material e++e-t in +uture $eri*ds be-ause *+ a -umulative e++e-t6 d6 e m*tivati*n *+ management /it res$e-t t* te misstatement6 e6 e eisten-e *+ statut*ry *r regulat*ry re$*rting reuirements tat a++e-t materiality tres*lds6 7 A++uming the poli6 6hange i+ 6on+idered material, ho5 +hould it 3e reported and di+6lo+ed in the 2)1 4inan6ial +tatement+ and 5hat 5ould 3e the e44e6t, i4 an, o4 the a66ounting 6hange on the auditor+ report

e $*li-y -ange is -*nsidered t* be material in te +*ll*/ing tree /ays su- as /en tere is a -ange in te a--*unting $rin-i$les a -ange in te a--*unting estimati*n and a -ange due t* a--*unting err*r6

 A Change in A66ounting #rin6iple

A -ange in a--*unting $rin-i$le may be a v*luntary -ange +r*m *ne generally a--e$ted $rin-i$le t* an*ter *r a mandat*ry -ange be-ause FASB as ad*$ted a ne/ $rin-i$le6 A -ange in a--*unting $rin-i$le als* in-ludes a -ange in te $r*-edures used t* a$$ly te a--*unting $rin-i$les6 *mm*n -anges in a--*unting $rin-i$les in-lude -anges in invent*ry -*st +l*/ assum$ti*ns *r revenue re-*gniti*n met*ds6 n-e a -*m$any ad*$ts an a--*unting $rin-i$le te $rin-i$le s*uld n*t be -anged unless a $re+erable $rin-i$le is ad*$ted6 e usti+i-ati*n +*r te -ange s*uld be -learly dis-l*sed in te n*tes t* te -*m$anyMs +inan-ial statements6 A -*m$any a--*unts +*r a -ange in a--*unting $rin-i$le by te retr*s$e-tive a$$li-ati*n *+ te ne/ a--*unting $rin-i$le t* all $ri*r $eri*ds6 e -umulative e++e-t *+ -anging t* te ne/ a--*unting $rin-i$le (net *+ in-*me taes) is s*/n as an adustment t* te beginning balan-e *+ retained earnings (/it -*rres$*nding adustments t* te -arrying values *+ assets and liabilities tat are a++e-ted by te -ange)6

e -*m$any ten uses te ne/ a--*unting $rin-i$le in its -urrent +inan-ial statements6 e +inan-ial statements *+ $ri*r $eri*ds are restated as i+ te ne/ a--*unting $rin-i$le ad been a$$lied in tat $eri*d6 e -*m$anys dis-l*sures in-lude te nature and reas*n +*r te -ange a des-ri$ti*n *+ te $ri*r.$eri*d +inan-ial statement in+*rmati*n tat /as retr*s$e-tively adusted te e++e-t *+ te -ange *n in-*me earnings $er sare and any *ter +inan-ial statement line item tat /as retr*s$e-tively adusted and te -umulative e++e-t *+ te -ange *n retained earnings at te beginning *+ te earliest $eri*d $resented6 =+ it is n*t $ra-ti-able t* retr*s$e-tively a$$ly te ne/ a--*unting $rin-i$le t* a $ri*r $eri*d a -*m$any s*uld a$$ly te ne/ a--*unting $rin-i$le as i+ te -ange /as made $r*s$e-tively as *+ te earliest date $ra-ti-able6 en a -ange in a--*unting $rin-i$le as b*t dire-t and indire-t e++e-ts *n te -*m$anys in-*me *nly te dire-t e++e-t *+ te -ange in a--*unting $rin-i$le is in-luded in te retr*s$e-tive adustment6 Any indire-t e++e-ts are in-luded in te year in /i- te a--*unting -ange is made6 e retr*s$e-tive adustment met*d enan-es -*m$arability be-ause te +inan-ial statements are $re$ared using -*nsistent a--*unting $rin-i$les6 'a*r disadvantages *+ tis met*d in-lude: -*n+usi*n -aused by -anging te $ri*r years +inan-ial statements in-*nsisten-y /it te all.in-lusive -*n-e$t *+ in-*me (be-ause adustments are made dire-tly t* retained earnings and by$ass te in-*me statement) adverse im$a-ts *n a -*m$anys -*ntra-tual arrangements and te $*ssibility tat a -*m$anys management may attem$t t* mani$ulate in-*me by e-luding items +r*m te -urrent years in-*me statement6 A -*m$any a--*unts +*r a -ange in a--*unting $rin-i$le at te beginning *+ te +irst interim $eri*d regardless *+ te interim $eri*d in /i- it ma!es te -ange6

 A Change in A66ounting E+timation

A -ange in a--*unting estimate n*rmally results /en un-ertainties are res*lved as ne/ events *--ur m*re e$erien-e is a-uired *r as ne/ in+*rmati*n is *btained6 anges in estimates are given $r*s$e-tive a--*unting treatment6 at is te -*m$any adusts te -urrent (and +uture) +inan-ial statements t* re+le-t te ne/ estimate6 ri*r yearsM +inan-ial statements are n*t adusted +*r -anges in a--*unting estimates6 e $r*s$e-tive treatment redu-es -*m$arability be-ause results re$*rted in te years be+*re te -ange are based *n di++erent estimates tan te years a+ter te -ange6 =+ a -ange in a--*unting estimate -ann*t be distinguised +r*m a -ange in a--*unting $rin-i$le (e6g6 a -ange in de$re-iati*n met*d) it is -*nsidered a -ange in estimate a++e-ted by a -ange in a--*unting $rin-i$le and is a--*unted +*r $r*s$e-tively6

 A66ounting 4or a Corre6tion o4 an Error

&rr*rs in-lude matemati-al mista!es mista!es in te a$$li-ati*n *+ a--*unting $rin-i$les *versigts *r intenti*nal misstatements *+ a--*unting re-*rds6 FASB Statement 7*6 154 reuires tat a -*m$any a--*unt +*r te -*rre-ti*n *+ material err*r made in $revi*us $eri*ds as a $ri*r $eri*d restatement (adustment)6 e -*rre-ti*n *+ an err*r (net *+ te related in-*me ta e++e-ts) is re+le-ted as an adustment t* te beginning balan-e *+ a -*m$anyMs retained earnings +*r ea- $eri*d $resented (/it -*rres$*nding adustments t* te -arrying values *+ assets and liabilities tat are a++e-ted by te err*r)6 is met*d is similar t* te retr*s$e-tive a$$li-ati*n *+ a ne/ a--*unting $rin-i$le dis-ussed earlier6 &rr*rs may a++e-t *nly a -*m$anyMs in-*me statement *r *nly its balan-e seet *r b*t +inan-ial statements6 &rr*rs a++e-ting *nly te -lassi+i-ati*n *+ eiter in-*me statement *r balan-e seet items -an be -*rre-ted /it*ut a *urnal entry be-ause te $arti-ular +inan-ial statement item *nly needs t* be re-lassi+ied6 &rr*rs a++e-ting b*t te in-*me  "o ou 6on6ur 5ith management+ a++e++ment that the a66ounting 6hange i+ immaterial and there4ore, re=uire+ no di+6lo+ure &h or 5h not

e d*nt -*n-ur /it managements assessment tat te a--*unting -anges reuires n* dis-l*sure6 Be-ause dis-l*sures are a +undamental $art *+ +inan-ial statements seen as an in-reasingly im$*rtant /ay +*r $re$arers t* -*mmuni-ate dee$er insigts ab*ut te entitys +inan-ial $*siti*n and +inan-ial $er+*rman-e tan is $*ssible tr*ug te $rimary +inan-ial statements al*ne6 =+ tere a--*unting $*li-y -ange li!e in tis -ase managements s*uld dis-l*se it6 =t als* t* give in+*rmati*n +*r user tat te a--*unting -ange is immaterial6 '*st li!ely any dis-l*sure +*r tis a--*unting $*li-y -ange /*uld a$$ear in te +**tn*te dis-ussing I*ter assets6J

Ca+e 127 KNK =n-6 Deveraging Audit Findings t* r*vide Oalue.Added =nsigts in a 'anu+a-turing &nvir*nment INTRO"UCTION

S$en-er and D*veland DD is a medium.si?ed regi*nal a--*unting +irm based in te /estern *+ te CS6 S$en-er /ill audit its ne/ -lient KNK a manu+a-turing -*m$any tat -reates a variey *+ $i-ture +rames6 S$en-er /ill audit te +inan-ial statements +*r 20146 KNK is a $rivately */ned -*m$any6 S$en-er and l*veland as a re$utati*n +*r $r*viding value t* its -lient ab*ve and bey*nd te ig uality auditing servi-es te +irm $r*vides6 us tis audit engagement team as been instru-ted t* generate suggesti*ns tat migt el$ im$r*ve te gr*/t and $r*+itability *+ KNK /i- ave ta!en a turn +*r te /*rse during te $ast year6 KNKs *riginal lab*r.intensive -ust*m.+rame line a$$ears t* be struggling6 KNKs $r*du-ti*n manager as l*ng believed tat it /as *nly a matter *+ time be+*re te -*m$anys *lder -ust*m.+rame line /*uld begin t* l*se te l*ng.term $r*+itability be-ause te rising *+ -*st +*r s!illed lab*r *ver te $ast several years6 S* tat e de-ide t* e$and te -*m$any t* te ne/ area /i- is mass $r*du-e $lasti- +rame tat is uiet $r*+itable6 * $r*du-e tis +rame KNK invested in te

sta++ audit*r *n te team ave $er+*rmed m*st *+ te audit $r*-edures *utlined *n te audit $r*gram and ave d*-umented y*ur +indings in te audit $a$ers6 As audit seni*r y*u are res$*nsible +*r revie/ing te audit s-edules and re$*rting t* te audit engagement manager any areas *+ -*n-ern /it res$e-t t* te audit6 =n additi*n te manager as!ed y*u t* analy?e te -lients invent*ry and $r*du-ti*n situati*n t* indi-ate any areas /ere y*u believe te +irm -an $r*vide value.added -*nstru-tive suggesti*ns t* te -lient6

-AC.!ROUN"

KNK =n-6 as +*unded 25 years ag* br*ters Kent and Kevin Sa/ started manu+a-turing -ust*m made $i-ture +rames +*r l*-al artists6 ey s**n reali?ed tere /as $r*+it t* be made in building large +rames +*r use by $ainting and $*rtrait studi*s6 Be-ause tey sell ig uality +rames te name r*se u$ as te best +rame manu+a-turer in te /estern $art *+ te Cnited States6 ,ue t* te nature *+ te +rames $r*du-ed te $r*du-ti*n $r*-ess +*r -ust*m +rames is lab*r intensive /i- reuired s$e-iali?ati*n in using -arving and sa$ing t**ls6 ere are tree basi- si?es (small medium and large) tat use variety *+ designs and materials6 Be-ause KNK genrating reas*nable $r*+it al*ng te /ay it started t* $enetrate te mar!et +*r small mass $r*du-ed ine$ensive metal +rame6 F*r tis tey t/* ma-ines t* $r*du-e +rames /it large uantity in s*rt time6 But tis e++*rt +ailed6tus te ma-ines remained idle tr*gt te se-*nd al+ *+ last year and -*m$any d*esnt $lan t* $r*du-e any m*re *+ tis ty$e *+ +rame6 KNK -urrently $r*du-es 46000 -ust*m and/**d +rames in a m*nt *r 486000 a year6 A+ter teir +ailure in te metal +rames tey started t* $lasti- +rames tr*ug investing
e
0UESTIONS AN" ANS&ER

a -rie4l li+t and explain the primar audit ri+8+ in the produ6tion and in9entor area o4 the .*. audit

A--*rding t* te des-ri$ti*n *+ te -ase tere are s*me $rimary $r*blems tat KNK /ill +a-e6 e +irst $r*blem tat K%K /ill +a-e related /it its invent*ry is -*ming +r*m te di++eren-e in te am*unt e$e-ted t* be s*ld and te am*unt /i- is s*ld6 KNK $r*du-e -ust*m and/**d +rames +*r 486000 units $er year and start t* $r*du-e $lasti- $i-ture +rames /i- able t* $r*du-e 06000 +rames $er m*nt (%206000 units $er year) a+ter te +ailed e$eriments /it mass $r*du-ed metal +rames6 e -ust*m and/**d +rames sales /ill n*t be-*me a $r*blem sin-e tis $r*du-t is s*ld /ell by KNK6 But te $r*blems /ill be -*ming +r*m te $lasti- $i-ture +rames6 KNK /i- $r*du-ed %206000 +rames $er year migt n*t meet its e$e-ted selling6 =n *ter /*rds te +rames /i- are s*ld are n*t as many as te management e$e-t6 K%K invent*ry is -*nsist *+ tese +rames tat may *r may n*t be able t* be s*ld6 Be-ause te $ri-e *+ te +rame is based *n te mar!et value te uns*ld +rames value migt be di++er /it te reali?ed mar!et value resulted in te iger value *+ te +rames *n and -*m$ared t* reali?eable mar!et value6

An*ter ting t* -*n-ern is te valuati*n and te de$re-iati*n *+ ma-inery6 e $r*du-ti*n -y-le *+ te +rames must be de+ined6 e $r*du-ti*n -y-le /ill a++e-t te valuati*n and te de$re-iati*n *+ te ma-ines be-ause te $r*du-ti*n -y-le /ill a++e-t te met*d *+ de$re-iati*n tat te -*m$any use6 =n ere te audit*r need t* ma!e sure te l*gi- reas*n *+ /y a de$re-iati*n met*d is em$l*yed and te a$$r*$riate use+ul li+e *+ ma-ine +*r de$re-iati*n6 And ten te audit*r als* need t* -*n-ern ab*ut te a--ura-y *+ te ma-inery value and its de$re-iati*n value6 Be-ause te management rent te ne/ st*rage +a-ility +*r te $r*du-t te $r*blems tat /ill -*me u$ is related /it te value *+ te invent*ry6 e management st*res te +rames in m*re tan *ne st*rage +a-ility /ill in-rease te li!eli**d *+ invent*rys value misstatement be-ause tere migt be s*me une$e-ted events6 F*r eam$le /en te +rames is m*ved t* a st*rage tere migt be s*me +rames /i- are missed t* be in-luded in te t*tal invent*rys value6 e net $r*blem is related /it te lab*r -*st6 e audit*r need t* ma!e sure i+ te lab*r -*st +*r te maintenan-e *+ te ma-inery is -lassi+ied in te +a-t*ry *veread -*st6 =+ tis -*st is -lassi+ed /r*ngly it /ill -ause te mistatement tat migt be material (sin-e te -*st is ig)6 3 Identi4 an a66ounting or auditing i++ue+ in the 5a .. handle+ it+ produ6t 6o+t+, in6luding allo6ation, that need to 3e adre++ed in the 6urrent audit

Be-ause KNK $r*du-e *m*gen*us and lab*r intensive $r*du-t line it $r*baly a$$r*$riate +*r KNK t* de+ine te *veread -*st based *n te dire-t lab*r -*st driver6 But be-ause te $lasti- $i-ture +rame is $r*du-ed by ma-ine (ma-ine intensive) te *veread -*st +*r tis $r*du-t s*uld n*t be -al-ulated based *n dire-t lab*r -*st driver +r*m te -*mm*n *veread $**l6 S* tat a ne/ -*sting system is reuired in-luding di++erent -*st $**l and -*st driver +*r ea- $r*du-t6 en te *veread all*-ati*n in -ust*m and/**d +rame is iger tan te *veread all*-ati*n in te $lasti- $i-ture +rame6 Be-ause *+ tis -*nditi*n te -*st *+ g**d s*ld $r*bably d*ent -*rre-tly stated6 e am*unt *+ $lasti- $i-ture +rame /i- is ig added /it ig uantitiy (invent*ry) *+ te +rame /ill ma!e te value *+ $lasti- $i-ture +rame invent*ry l*/er /ile te -*st *+ g**d /ill be iger6 * *ver-*me tis issue te audit*r -an give suggesti*ns a+ter a tr*ug*ut analysis t*/ard te issue is d*ne6 By d*ng tis te audit*r d* n*t *nly s*lve te -lients issue but e als* elevate te servi-e tat e $r*vide t* KNK

RE%ERENCES -oo8 and E3oo8J

=AASB620156 #andb**! *+ =nternati*nal Lualit y *ntr*l Auditing
tt$s:GG///6ias$lus6-*mGenG$r*e-tsGma*rGias.86 ,ia!ses $ada

Case Solution Chapter 12

Recommend Documents