accounting firm, working on the audit of Dream Rock Watches Ltd
(DRW) for the year ended 30 June 2022. The audit partner has asked
you to assist in the planning of the audit. You gather the
following information about DRW. DRW is a manufacturer of fine
watches, specializing in gold pocket watches and wristwatches made
with precious stones. Diamond engraved gold pocket watches are the
most popular sales items. While some of the precious stones are
purchased from Australian suppliers, others are purchased from
overseas suppliers. All stones are purchased in US dollars
regardless of the suppliers’ location. Due to environmental
concerns, some of the African governments are considering closing
down the diamond mines in their countries. The company employs two
watchmakers who design and manufacture all the watches sold by DRW.
The two watchmakers are nearing retirement age. The younger
generation is less interested in learning the watchmaker trade and
there are few watchmakers with the current employees’ skill base.
DRW manufacture classic watches and do not follow the latest
trends. DRW’s experience is that their inventory does not become
obsolete. DRW operates a retail store in the heart of Melbourne's
shopping district and employs two full-time and four part-time
sales staff. The part-time sales staff are university students.
Staff are nervous as there have been a number of recent violent
thefts on high-end stores throughout Melbourne. As a preventative
measure against theft, the store is kept locked. Customers now need
to knock on the glass door to be admitted into the store. The
watches are kept in locked display cases. Each of the sales staff
has a copy of the keys, and a spare copy is kept in the back
storeroom. DRW usually has two security guards, but one security
guard has left the company and has not been replaced. At night all
watches are removed from the display cases and locked in the safe.
The store has a security alarm direct to the police station which
is switched on at night when the last employee leaves. DRW
maintains a point of sale (POS) computer system and therefore uses
the perpetual inventory recording method. Most sales are made by
credit, but some customers choose to pay by cash. As there is no
bank nearby, DRW staff deposit cash into bank once a week, usually
on Thursday afternoon. In the past, the manager of the retail store
has conducted regular monthly stocktakes of the jewelry. However,
the manager has been on intermittent sick leave during the past
year, so stocktakes have become less frequent. DRW tries to provide
good facilities for its staff. It provides a staffroom with tea and
coffee supplies and biscuits. When the company runs low on these
supplies, the staff take cash from the DRW register and purchase
more tea, coffee and biscuits from the small supermarket nearby. In
the past, the company has been very profitable. However, over the
last few years, as the influence of Covid pandemic and the fact
that the cost of living has increased, people have been less
inclined to buy expensive watches and sales and profitability have
fallen. This year for the first time, the company has recorded a
loss. Key information from the financial statements on 30 June 2022
and 2021 are:
- Case Information You Are A Senior Auditor Employed In A Mid Tier Accounting Firm Working On The Audit Of Dream Rock Wat 1 (47.38 KiB) Viewed 44 times
Dream Rock Watches Ltd Income Statement for the year ended 30 June 2022 (Forecasted) $ '000 3,000 300 3,300 1400 620 100 125 200 800 215 3,460 -160 0 -160 Sales Revenue Other income Total Income Expenses Cost of goods sold Salaries Depreciation and Amortization expense Professional fees Other expenses Finance costs Rent expense Total Expenses Profit (Loss) before income tax expense Income tax expense Profit (Loss) after income tax expense 2021 $ '000 3600 100 3,700 1500 800 100 146.5 250 430 260 3,487 213.5 0 213.5