Yope Plastics Limited (YPL) is a federally incorporated company that manufactures moulded plastics for household and some
Question:
Yope Plastics Limited (YPL) is a federally incorporated company that manufactures moulded plastics for household and some industrial uses. It has a large number of customers throughout Canada. Some items are custom made but most are for stock. It is estimated that sales for the current year will be approximately \($5,800,000\) and net income \($265,000\). Major assets are accounts receivable (\($1,400,00)\) and inventories (\($1,700,000\) of which \($500,000\) is raw materials, \($200,000\) work in process and \($1,000,000\) finished goods). Major liabilities are bank debt amounting to \($900,000\) and accounts payable and accruals of \($650,000\). The year end is December 31.
The company has been managed by Mr. Yope, the owner, assisted by Mr. Grey, a competent but rather unimaginative treasurer/controller. The accounting systems have been ade¬ quate but not elaborate. No serious weaknesses in internal control have existed. The owner has had a rule-of-thumb method of calculating inventory balances in interim periods which is based on his knowledge of the operations and a tour of the plant. The inventory computed in this way by the owner has always coincided fairly closely with the audited inventory figure at the year end. The general ledger inven¬ tory accounts have been updated annually at the December 31 year end.
The annual financial statements have been used for Mr. Yope's own purposes, for income tax purposes, and for the bank. The financial statements were basically prepared by the auditor, who also prepared a number of detailed back-up schedules.
Fairly, Small & Co. has been the auditor for many years, is very familiar with the company, and, among other services, carries out a statutory audit. Mrs. Keen, CA, has just been appointed partner responsible for the client as a result of the retirement of one of the five partners in the firm. She has been involved with the audit ever since joining the firm as a student a few years previously. The senior who will be in charge of the field work this year has had two years' experi¬ ence with the client and will have two assistants working for him from time to time.
The audit has always been routine and there has never been any trouble except for minor arguments over fees. Mr. Yope has always been very cooperative but is not at all knowledgeable on accounting and financial matters. His background is engineering and he is an inventor. In the past, the auditors have reviewed internal control and done some preliminary planning in the month of October. Minimum reliance has been placed on the internal control system because the work has been heavily concentrated on the year- end amounts. Tests of controls have not been necessary except in the sales system to obtain reasonable assurance that all sales were recorded. The inventory count, cash count, and cutoff information were taken at December 31 of each year, and the receivable, payable, and other confirmations were as at December 31 and mailed in mid- to late January. The year- end audit work was usually started in mid-February and fin¬ ished in early March, which was the usual date of the auditor's report.
On March 31, 2001, Many Conglomerate Limited (MCL), also a federally incorporated company, purchased all the shares of YPL. Mr. Yope was retained as general manager, and Mr. Grey was also retained. In June 2001, MCL sent an accounting and systems person who 1. instructed Mr. Grey regarding a monthly and year-end reporting package and a new chart of accounts. No sub¬ stantial changes were found to be necessary except as noted below with respect to inventories.
2. devised and installed a cost system which enabled gen¬ eral ledger accounts to be updated on a monthly basis to account separately for raw materials, work in process, and finished goods.
3. prepared a budget for the coming year and instituted a budgeting system covering revenues and expenses and key balance sheet items.
Since then, Mrs. Keen has learned that Mr. Grey has adapted reasonably well to the monthly reporting and that the new inventory system does not seem to be causing major problems. However, Mr. Yope insists that it is too expensive and still relies on his rule of thumb. Mr. Grey has not yet come to grips with the budgeting system. Under the new sys¬ tem, the monthly trial balances (general ledger, accounts receivable, etc.) are usually ready by the 12th of the following month, and it takes about one additional day to prepare the reporting package for MCL. Mrs. Keen has also learned that YPL is planning to take its physical inventory at October 31, 2001, and then to rely on the general ledger entries between that date and the year end.
Fairly, Small & Co. has been informed that it will continue as auditor of YPL and that the company year end will remain at December 31. Mrs. Keen has also been informed of the fol¬ lowing matters by Giant and Co., the auditor of MCL:
1. A normal scope statutory audit will be satisfactory for consolidation purposes. However, Fairly, Small & Co. is expected to ensure that the year-end. reporting package provided by the company to MCL for consolidation pur¬ poses is reconciled to the audited financial statements prepared for shareholders. It will also be expected to ini¬ tial each page of the package for identification purposes and ship it directly to Giant and Co.
2. Giant and Co. will be relying on Fairly, Small & Co.'s report.
3. The audit has to be completed and the report signed by January 31, 2002.
Required
a. What further information should Mrs. Keen obtain from Giant and Co. and for what reasons?
b. Prepare a memorandum from Mrs. Keen to her senior staff member who will be running the field work, outlin¬ ing for him, in point form, the nature of the changes that must be made to the previous year's auditing approach so that he can prepare a detailed audit program. The memorandum should cover (1) general matters of which the audit staff should be made aware;
(2) changes which will be necessary in the review and evaluation of internal controls;
(3) cha iges in the nature and timing of other auditing procedures, particularly those relating to major asset and liability accounts.
The memorandum should be comprehensive in describ¬ ing the changes in the approach required but should not be a detailed list of auditing procedures, since the intention is that the senior prepare such a list. The memorandum should also point out areas where the change in approach would elimi¬ nate the necessity for work that was done in previous years.
(CICA adapted)
Step by Step Answer:
Auditing And Other Assurance Services
ISBN: 9780130091246
9th Canadian Edition
Authors: Alvin Arens, James Loebbecke, W Lemon, Ingrid Splettstoesser