During the past year, there was a fire which had damaged a piece of equipment. There is a pending insurance payout that is expected to be received in the next year which has been recorded in the financial statements as a gain on disposal for the equipment, the amount is not guaranteed, however, ABC expects to receive $100,000 to $125,000 for the payout. This equipment has been damaged beyond repair, as a result, ABC needed to acquire a replacement. ABC has always purchased their equipment outright, never requiring financing, as a result of a large cash investor. However, with recent economic turmoil there has been some difficulties with cashflows. As a result, ABC has opted to lease some equipment that will be used for the next twelve months. Typically, the industrial equipment would last 5 years, but this equipment is only used to fulfil an existing contract for the next twelve months. ABC currently doesn't plan on buying the equipment at the end of the lease because the cost is too high (nearly $150,000 or 75% of the new purchase price) whereas the leasing costs to rent per month are only $5,000. They have never dealt with leases before but the controller of ABC assured us that it is recorded correctly as outstanding debt. The Production Manager and the production team receive bonuses based on achieving production targets. These bonuses are calculated using the previous year's production data, i.e. production numbers need to exceed previous years to be eligible for the bonus. the process typically takes place at the end of the year. The bonuses are calculated and included in the first payroll of the new year as a Christmas surprise. The sales of the organization has always been contingent on having inventory available. Sales volumes have been increasing steadily for a number of years now, peaking this past year. The owners believe that increasing production numbers should help with recognizing cost efficiencies (economies of scales) and increase the margins on products, which currently sits at about 25%, which is an improvement over the historical rate of 20%. The company conducts regular inventory counts as part of their internal process. These counts include partial sections of the warehouse weekly and a full count each quarter. These counts are regularly completed, and has become very cumbersome, each quarter taking longer and longer to complete. Historically there has been minimal shrinkage and therefore minimal inventory adjustments because their inventory can be large and difficult to move. ABC started storing some smaller items outside in the yard and there has been some adjustments on these items for shrink. Earlier this year, the company purchased three new high-tech scanners to assist in cataloguing and counting the inventory in an effort to streamline the efficiency of the counts. These scanners cost $20,000 each and were expensed to the inventory costs for the period. The scanners have not yet had an impact on efficiency as some of the older staff do not understand them. This past year the warehouse manager had noticed that there was still some units of inventory that related to older products (several years old) which are not produced or regularly sold anymore, not even for the past two years. The warehouse manager decided to post some of the older inventory on eBay to facilitate sales. Some of the units have successfully sold on the site at a discount of around 60% of cost and the remainder rests in inventory at their cost of approximately $250,000.

The sales team has been noting it has been easier and easier to make sales as a result of the availability of inventory. The majority of sales happen to large customers who make multiple high volume orders a year, sometimes in excess of $100-200K who receive generous volume discounts based on the quantity they order. The sales team has been happy because they also receive bonuses based on sales volume so they have been well compensated in the past and again in this year. The increase in sales volume is puzzling to the owners because ABC has been having financial difficulties and reduced profitability, which they did not expect. The VP of Sales regularly interacts with the key customers, but does not directly review sales orders/invoices. The discounts given are tiered and follow a specific set of rules, therefore the VP of Sales does not bother checking the discounts given. One specific order was examined as an understanding for the client. Auditors LLP looked at an order with Sudbury Smart Staff ("SSS") which was for a large volume of items. This specific order was for 200 units of ABC's signature product. The price per unit is set at $1,250 and because of the volume discount it was sold for $175,000 as the total price. SSS is a wholesaler to the European market and has purchased repeatedly from ABC, each time being happy about the last. Purchases from SSS have reached a peak lately as well, with this order being the one of three this year, each being larger than ever before. SSS has been a customer of ABC for the past five years, there has never been any concerns regarding collectability which has prompted quick payments from SSS each year. ABC does not have formal credit checks in place and relies on customer histories for credit worthiness, which admittedly has burned ABC in the past. This sale was recorded as $250,000 in revenue with an expense to cost of goods sold for the discount. These units are expected to be delivered to SSS in full by February of next year.

Required:

a. Identify the accounting problems that are been experiencing over the years and for the year ending 31st December 2023.

b. What are the control weaknesses and recommendations for improvements

c. Provide a basic procedure that could be performed that could help the financial reporting isales and also identify the assertions the procedure will be testing

d. Assess the financial reporting issues and why