Case

To: Kris Munroe, CFO

From:

Re: Audit engagement

Issue: Scrap recorded as an Inventory

GAAP: IAS 2

6 The following terms are used in this Standard with the meanings specified:

Inventories are assets:

(a) held for sale in the ordinary course of business;

(b) in the process of production for such sale; or

(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Bias: Management might have an intention to increase their Current ratio by increasing their current assets

Recommendation: They should not add the scrap in the inventory but they need to expense it. If they expensing the inventory their current ratio will go down.

Audit Risk: Specific risk

Confirming the Accounts Receivable (AR) with Manley Mann

Factor increases risk

• Maintain the current ratio of 1.1

• Slower USA economy

• Sales were drown from the previous year

• Volatility in the prices of steel that can encourage them to use the higher sales price to increase their revenue

Factor decreasing risk

• They have limited time to get their financial statement audited, which is requested by bank and two of their suppliers.

Audit approach: We need to use the substantive approach as they have weaker control that can lead to more errors.

Materiality: Their financial statement is important to the bank and their two large suppliers; therefore any error in the Accounts receivable can increase or decrease their current ratio. Loans, Current Ratio and covenants are involved, which are based on the financial statement. This makes any error material.

Procedures: Reconciling the confirmation receipt with the Accounts receivable, which will need to check for the following assertions:

Cut off: Match the Accounts receivable with the confirmation receipt to find whether the transactions are noted in the same accounting period

Accuracy: Compare the accounts receivable with the purchase receipt

Risk: Overall risk

Factors increasing risk

• Bank indicated interest rate on confirmation 2% higher than the agreement

• Volatility in the prices of steel that can encourage them to use the higher sales price to increase their revenue