Question
You are the manager responsible for the audit of Covid Manufacturing Berhad, one of the world's leading manufacturer of nitrile gloves. The draft financial statements
You are the manager responsible for the audit of Covid Manufacturing Berhad, one of the world's leading manufacturer of nitrile gloves. The draft financial statements for the year ended 31 December 2019 recorded total assets of RM1.9 billion (2018 - RM1.8 billion), revenue of RM1.1 billion (2018 - RM997 million) and profit before tax of RM107 million (2018 - RM110 million). The final audit is nearing completion and you are reviewing the audit working papers. Two issues from the audit working papers are summarised below:
1. Inventory Costs Inventory costs include all purchase costs and the costs of conversion of raw materials into finished goods. Conversion costs include direct labour costs and an allocation of production overheads. Direct labour costs are calculated based on the average production time per unit of inventory, which is estimated by the production manager, multiplied by the estimated labour cost per hour. The estimated labour cost per hour is calculated using the forecast annual wages of production staff divided by the annual scheduled hours of production. Production overheads are all fixed and are allocated based upon the forecast annual units of production. At the year-end inventory was valued at RM21 million (2018 - RM20 million)
Required Critically discuss the risks of material misstatements and the audit evidence you would expect to find during your file review in respect of the audit of the above. (10 Marks)
2. Acquisition of Sars Enterprise Sdn Bhd On 15 January 2020, Covid Manufacturing had acquired Sars Enterprise Sdn Bhd, a distributor of medical supplies for the ASEAN region in a bid to expand its distribution network. Sars Enterprise represents a significant acquisition, but this has not been referred to in the financial statements.
Required Critically discuss the audit procedures that you would undertake and the evidence that you would obtain in the audit of the above matter. (10 Marks)
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