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Sulzer manufactures fizzy drinks such as cola, lemonade, and other soft drinks; its year-end is 31 December 2022. You are the audit manager of F&B
Sulzer manufactures fizzy drinks such as cola, lemonade, and other soft drinks; its year-end is 31 December 2022. You are the audit manager of F&B and are currently planning the audit of Sulzer. You attended the planning meeting with the engagement partner and finance director last week and recorded the minutes from the meeting shown below. You are reviewing these as part of preparing the audit strategy.
Minutes of the planning meeting for Sulzer
Sulzers trading results have been strong this year, and the company is forecasting revenue of $85 million, an increase from the previous year. The company has invested significantly in the factorys cola and fizzy drinks production process. This resulted in an expenditure of $5 million on updating, repairing, and replacing a significant amount of the machinery used in production.
As the production level has increased, the company has expanded the number of warehouses it uses to store inventory. It now utilises 15 warehouses; some are owned by Sulzer, and some are rented from third parties. Inventory counts will occur at all 15 sites at the years end.
A new accounting general ledger was introduced at the beginning of the year, with the old and new systems being run in parallel for two months.
As a result of the increase in revenue, Sulzer has recently recruited a new credit controller to chase outstanding receivables. The finance director thinks it is unnecessary to maintain an allowance for receivables and has released the opening allowance of $15 million.
In addition, Sulzer has incurred an expenditure of $45 million on developing a new brand of fizzy soft drinks. The company started this process in January 2022 and is close to launching its new product into the marketplace.
The finance director stated that there was a problem in November with mixing raw materials within the production process, resulting in a large batch of cola products tasting differently. Some of these products were sold; however, no further sales have been made due to customer complaints about the flavour. No adjustment has been made to the valuation of the damaged inventory, which will still be held for $1 million at the year-end.
As in previous years, the management of Sulzer is due to be paid a significant annual bonus based on the value of year-end total assets.
(d) Describe substantive procedures the audit team should perform to obtain sufficient and appropriate audit evidence concerning the following three matters:
i) The treatment of the $5 million expenditure incurred on improving the factory production process.
ii) The release of the $15 million allowance for receivables.
iii) The damaged inventory.
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