You work on the audit team conducting the statutory audit of Company LM. The following information has been provided to
Posted: Sat May 07, 2022 7:44 pm
You work on the audit team conducting the statutory audit of
Company LM. The following information has been provided to you:
Company ‘LM’ manufacture clothing and footwear for several
well-known sportswear brands. LM are based in the UK but also have
a manufacturing unit located in Europe. The financial statement
yearend is 31st March 2022. LM’s main product line are sports
trainers which they manufacture for mass market distribution. LM
also specialise in the design and manufacture of custom-built
trainers for individual customers which sell for thousands of
pounds. Recently, a customer ordered a pair of trainers that were
studded with genuine diamonds and precious metals. Company LM pride
themselves on working with some of the most famous trainer
designers in the industry. The main designer for their custom-built
range is located in the U.S.A, therefore stocks of raw materials,
work in progress product and finished product belonging to LM are
located at the designer’s premises. LM has recently launched a new
range of trainers incorporating wearable technology for the mass
market. Sales of the new range have been slow and as a result, a
significant amount of inventory has been accumulated. LM had
originally estimated that demand for their new wearable technology
trainers would be high. Machinery was purchased to manufacture the
new product range and to increase their overall manufacturing
capacity. The cost of the machinery was £2.5 million, and this
amount has been included on the fixed asset register as an addition
to fixed assets. The new machinery is due for delivery on 10th May
2022. A 30% deposit was paid on the 31st January 2022. The
remaining balance is due 30 days before delivery. Materiality has
been calculated at 5% of profit before tax. Profit before tax for
the year is £44,860,000. Part of the factory buildings located in
the U.K. have been refurbished to house the new machinery and
provide extra facilities. The refurbishment includes the purchase
of new workbenches, a new staff room with kitchen and an office
area. LM has several other buildings which are currently used to
store raw materials for a third party. During the year, the
following events also occurred: • Old machinery and computer
equipment was sold at scrap value. • A fleet of delivery vans were
replaced. • Employees of LM were offered the opportunity to
purchase any of the non-current assets being disposed. • Factory
buildings situated in the U.K. were revalued. The revaluation was
carried out by an experienced qualified surveyor who is a family
friend of the finance director.
Required: a) Using the information supplied above, discuss
FIVE risks that could cause the noncurrents assets figure in the
financial statements of Company LM to be misstated. Outline the
substantive (audit) procedures that the auditor would perform over
the risk areas identified. (10 marks)
Company LM. The following information has been provided to you:
Company ‘LM’ manufacture clothing and footwear for several
well-known sportswear brands. LM are based in the UK but also have
a manufacturing unit located in Europe. The financial statement
yearend is 31st March 2022. LM’s main product line are sports
trainers which they manufacture for mass market distribution. LM
also specialise in the design and manufacture of custom-built
trainers for individual customers which sell for thousands of
pounds. Recently, a customer ordered a pair of trainers that were
studded with genuine diamonds and precious metals. Company LM pride
themselves on working with some of the most famous trainer
designers in the industry. The main designer for their custom-built
range is located in the U.S.A, therefore stocks of raw materials,
work in progress product and finished product belonging to LM are
located at the designer’s premises. LM has recently launched a new
range of trainers incorporating wearable technology for the mass
market. Sales of the new range have been slow and as a result, a
significant amount of inventory has been accumulated. LM had
originally estimated that demand for their new wearable technology
trainers would be high. Machinery was purchased to manufacture the
new product range and to increase their overall manufacturing
capacity. The cost of the machinery was £2.5 million, and this
amount has been included on the fixed asset register as an addition
to fixed assets. The new machinery is due for delivery on 10th May
2022. A 30% deposit was paid on the 31st January 2022. The
remaining balance is due 30 days before delivery. Materiality has
been calculated at 5% of profit before tax. Profit before tax for
the year is £44,860,000. Part of the factory buildings located in
the U.K. have been refurbished to house the new machinery and
provide extra facilities. The refurbishment includes the purchase
of new workbenches, a new staff room with kitchen and an office
area. LM has several other buildings which are currently used to
store raw materials for a third party. During the year, the
following events also occurred: • Old machinery and computer
equipment was sold at scrap value. • A fleet of delivery vans were
replaced. • Employees of LM were offered the opportunity to
purchase any of the non-current assets being disposed. • Factory
buildings situated in the U.K. were revalued. The revaluation was
carried out by an experienced qualified surveyor who is a family
friend of the finance director.
Required: a) Using the information supplied above, discuss
FIVE risks that could cause the noncurrents assets figure in the
financial statements of Company LM to be misstated. Outline the
substantive (audit) procedures that the auditor would perform over
the risk areas identified. (10 marks)