Auditing';Falmer Metals Ltd case

Auditing’;Falmer Metals Ltd case ;

Project description

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Added on 24.11.2014 22:48

Falmer Metals Ltd case

Your firm has recently been appointed as the external auditor of Falmer Metalwork
Ltd (Falmer). You are the senior responsible for planning the external financial audit for the year ended 30September 2014 and the engagement partner has asked you to consider the following key areas of audit risk:
(A) Work in progress
(B) Trade receivables
(C) Trade payables

Falmer supplies high quality, fashionable, customised light fittings to hotels and restaurants. Customers commission Falmer to design and construct light fittings to their specific requirements using specialist metals. When a customer commissions work, a Falmer designer meets with the customer to draw the design and calculate a fixed price for the work. The customer is required to provide written approval of the design and price before the design is passed to the production team who order the metals required and construct the light fitting. Customers are invoiced and revenue is recognised when the light fittings are despatched, which may be many months after the date of the commission. Falmer’s credit terms are 30 days.

All direct costs (labour, metal and other materials) relating to each commission are recorded in Falmer’s job costing system. Each month these direct costs are manually transferred into the job costing system from the payroll and purchases systems. The direct costs recorded in the job costing system are used as a basis for the calculation of the work in progress figure to be included in the financial statements. The finance director adds 20% to the direct costs to cover overheads.

It is Falmer’s policy to order the metals required for a commission only when written approval of the design is received from the customer. Metals are purchased from suppliers around the world who invoice Falmer in their local currency.

Falmer’s light fittings have recently become very fashionable and the volume of commissions has grown rapidly. As a result, Falmer sourced its metals from a number of new suppliers during the year, to avoid production delays. However, it has experienced quality issues with metals from some of the new suppliers which have resulted in a number of customer complaints.

In April 2014 Falmer’s finance director appointed an internal auditor, Chris Forbes, as she was concerned that Falmer’s internal controls were inadequate for the increasing size of the business. She instructed Chris to undertake a review of Falmer’s internal controls over purchasing. Chris concluded that the internal controls were effective with the exception of the following internal control deficiencies:
•    Supplier statements are not retained or reconciled with the payables ledger.
•    Metals were ordered and work started on some commissions before written approval of the design and price were obtained from the customer.

Chris resigned and left his post as internal auditor in September 2014 without completing his final report on the internal controls over purchasing. The engagement partner has provided you with the following extracts from the financial statements of
Falmer which are to be used as part of your consideration of the key audit risks:

Statement of profit or loss for the year ended 30September
2014             2013
(draft)         (audited)
£’000             £’000
Revenue             8,997             6,128
Cost of sales         (6,468)         (4,413)
Gross profit             2,529             1,715
Statement of financial position as at 30September
2014             2013
(draft)         (audited)
£’000             £’000
Current assets
Work in progress         1,015             587
Trade receivables         980             451

Current liabilities
Trade payables         571             483

On 1 June 2014, Falmer acquired 100% of the ordinary share capital of York Ltd
(York). Falmer is required to prepare group financial statements for the year ended
30 September 2014 and your firm will act as group auditor. York’s financial statements for the year ended 30 September 2014 will be audited by another audit firm, Huggett LLP. The financial statement extracts above exclude financial information relating to York.

Discuss the main audit postulates and concepts relevant to this case.
You should illustrate your answers with reference to relevant audit theory and comparison with real world examples where possible

Could you use:
Postulate

Subject matter remote, complex, significant for the discharge of the duty
Standard of accountability can be set, measure and compare with known criteria.

Concept

Concept of Materiality

Concept of Audit Risk

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