International Training Center (ITC) is a large company limited by shares which operates a network of teaching centers in countries across West Africa. The Company was incorporated under the requirements of the Companies Act, 1963 (Act 179) on 19 January 1990 and domiciled in Ghana. Students who register with the Center pay 30% during initial registration and the remaining 70% over the course period. You are the senior Associate of Add Consult. ITC is a new client and you are currently planning the audit with the audit manager to audit the company for the year ended 31 December 2017.
You have been provided with the following planning notes from the audit partner following his meeting with the Finance Director.
- ITC purchases stationery from a supplier in China and these goods are shipped to the company’s central warehouse. The goods are usually in transit for a fortnight and the company correctly records the goods when received. ITC does not undertake a year-end inventory count, but carries out monthly continuous (perpetual) inventory counts and any errors identified are adjusted in the inventory system for that month.
- During the year the directors of the Company have each been paid a significant bonus, and they have included this in wages and salaries expenses. Separate disclosure of the bonus is required by the Companies Act.
- ITC has a policy of revaluing its land and buildings and this year has updated the valuations of all land and buildings.
- During the year the company introduced a bonus based scheme on sales for its sales persons. The bonus target was based on increasing the number of students signing up for 6-month courses by the school for individuals running accountancy examinations. This has been successful and revenue has increased by 25%, especially in the last few months of the year. The level of receivables is considerably higher than last year and there are concerns about the creditworthiness of some students.
Required:
b) Identify FIVE (5) audit procedures Add Consult should perform in order to place reliance on the continuous (perpetual) counts for year-end inventory. (5 marks)
View Solution
- The audit team should attend at least one of the continuous (perpetual) inventory counts to review whether the controls over the inventory count are adequate.
- The audit team should confirm that all of the inventory lines have been counted or are due to be counted at least once a year by reviewing the schedules of counts undertaken/due to be undertaken.
- Review the adjustments made to the inventory records on a monthly basis to gain an understanding of the level of differences arising on a month by month basis.
- If significant differences consistently arise, this could indicate that the inventory records are not adequately maintained.
- Discuss with management how they will ensure that year-end inventory will not be under or overstated.
- Consider attending the inventory count at the year end to undertake test counts of inventory from records to floor and from floor to records in order to confirm the existence and completeness of inventory.
( Any 5 points)
c) Describe substantive procedures Add Consult should perform to confirm the directors’ bonus payments included in the financial statements. (5 marks)
View Solution
- Obtain a schedule of the directors’ remuneration including the bonus paid and cast the addition of the schedule.
- Agree the individual bonus payments to the payroll records.
- Confirm the amount of each bonus paid by agreeing to the cash book and bank statements.
- Review the board minutes to confirm whether any additional bonus payments relating to this year have been agreed.
- Obtain a written representation from management confirming the completeness of directors’ remuneration including the bonus.
- Review any disclosures made of the bonus and assess whether these are in compliance with local legislation.
(Any 5 points)