The company manufacturers two models of compacting machines for construction use,namely Model WK211 and Model WK211X. The audited financial statements for the years ended 31 June 2017 and 2018, as well as the unaudited financial statements ended 31 June 2019, are presented above.

Supplementary information related to the company and its operation:

1. All sales are on credit, with net 30 days term.
2. A one-year warranty covering manufacturing defects is offered by the company.
3. A periodic inventory system is used and year-end inventory is determined by a physical count on 31 June. The physical count for 2019 has been conducted on the planned date and was observed by the auditors. Various test counts have been executed by the auditors although additional audits test involving inventory has not been done.
4. The average interest rate on all debt is 8%. Annual interest and principal payments are due each January. 1.
5. The overhead standards shown exclude depreciation. The inventory carrying cost for finished goods was determined by adding a depreciation factor to the material-labour-overhead standard.

Required:

Examine the companys financial statements. Determine the potential accounting issues or operational problems faced by the Closeup Manufacturing in the year ended 31 June 2019. For each issue or problem, report:

• The accounts with irregular balances and the reasoning of such evaluation.
• The possible causes that could have caused the irregularity.
• Specific elements of the business that should be given extra consideration during the 2019 audit. (40 marks)

2017 Closeup Manufacturing Schedule of gross profit for the years ended 31 June 2019 2018 Model WK211X Sales RM367,360 RM355,968 RM345,856 Cost of goods sold: Materials 113,664 111,104 107,520 Labour 68,736 68,096 64,640 Overhead 38,528 35,328 34,560 Standard cost variances -2,304 -384 256 Depreciation 7,808 7,680 7,424 228,480 221,824 214,400 Gross profit 138,880 134,144 131,456 Closeup Manufacturing Income statement for the years ended 31 June 2019 2018 2017 Sales revenue RM1,063,360 RM987,264 RM959,104 Cost of goods sold 740,192 688,768 668,800 Gross profit 323,168 298,496 290,304 Selling and general expenses 213,888 207,616 201,856 Depreciation expense 2,168 7,040 6,272 Warranty expense 9,600 8,320 7,040 Bad debt expense 16,875 10,880 11,520 Legal fees 21,664 1,792 1,536 Interes expense 14,080 16,256 17,280 Income before taxes 44,893 46,592 44,800 Income tax expense 9,216 13,952 13,312 Net income 35,677 32,640 31,488 Dividends paid 16,000 16,000 12,800 2017 RM 9,856 84,224 (7,680) 36,608 Closeup Manufacturing Balance Sheet as at 31 June 2019 2018 Cash RM 46,208 RM 21,120 Accounts receivable 133,440 86,272 Bad debt allowance (13,035) (7,680) Inventories: Raw materials 41,216 38,912 Finished goods: WK211 97,664 94,464 WK211x 51,840 49,920 Prepaid expenses 1,024 256 Total current assets 358,357 283,264 Land 57,600 57,600 Building and equipment 238,720 237,824 Accumulated depreciation (115,960) (101,120) Total assets 538,717 477,568 90,880 47,872 512 262,272 57,600 234,368 (78,080) 476,160 2018 141,696 2,048 Closeup Manufacturing Schedule of gross profit for the years ended 31 June 2019 2017 Model WK211 Sales RM696,000 RM631,296 RM613,248 Cost of goods sold: Materials 262,560 234,880 227,968 Labour 154,944 137,472 133,504 Overhead 88,192 84,992 84,736 Standard cost variances -2,944 640 -512 Depreciation 8,960 8,960 8,704 511,712466,944 454,400 Gross profit 168,960 164,352 158,848 Accounts payable Taxes payable Accrued interest Warranty liability Current portion of long-term debt Total current liabilities Long-term debt Total liabilities Paid-in capital Retained earnings Total stockholder' equity Total liabilities and equity 5,120 12,800 161,664 166,400 328,064 70,400 140,253 210,653 538,717 86,400 1,792 1,280 5,120 12,800 107,392 179,200 286,592 70,400 120,576 190,976 477,568 88,832 1,664 1,408 5,120 12,800 109,824 192,000 301,824 70,400 103.936 174,336 476,160