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    AA REV Dec 2011 Q3 - Lincoln Co Question

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    Tapiwa K Ngungunyani
    The document discusses an audit of Lincoln Co. It provides information about the company's operations, new product development, inventory valuation methods, new accounting system implementation, and financing activities. The auditor is asked to identify audit risks based on this information and describe substantive audit procedures to address inventory risks.

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    AA REV Dec 2011 Q3 - Lincoln Co Question

    Uploaded by

    Tapiwa K Ngungunyani
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    The document discusses an audit of Lincoln Co. It provides information about the company's operations, new product development, inventory valuation methods, new accounting system implementation, and financing activities. The auditor is asked to identify audit risks based on this information and describe substantive audit procedures to address inventory risks.

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    The document discusses an audit of Lincoln Co. It provides information about the company's operations, new product development, inventory valuation methods, new accounting system implementation, and financing activities. The auditor is asked to identify audit risks based on this information and describe substantive audit procedures to address inventory risks.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    10 views2 pages

    AA REV Dec 2011 Q3 - Lincoln Co Question

    Uploaded by

    Tapiwa K Ngungunyani
    The document discusses an audit of Lincoln Co. It provides information about the company's operations, new product development, inventory valuation methods, new accounting system implementation, and financing activities. The auditor is asked to identify audit risks based on this information and describe substantive audit procedures to address inventory risks.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    AA - Revision

    Dec 2011 Q3 - Lincoln Co

    QUESTION:

    a) Explain the components of audit risk and, for each component, state an example of a factor which
    can result in increased audit risk.
    (6 marks)
    Lincoln Co develops, manufactures and sells a range of pharmaceuticals and has a wide customer base across
    Europe and Asia. You are the audit manager of Nate & Co and you are planning the audit of Lincoln Co whose
    financial year end is 31 January. You attended a planning meeting with the finance director and engagement
    partner and are now reviewing the meeting notes in order to produce the audit strategy and plan. Revenue for the
    year is forecast at $25 million.

    During the year the company has spent $2·2 million on developing several new products. Some of these are in the
    early stages of development whilst others are nearing completion. The finance director has confirmed that all
    projects are likely to be successful and so he is intending to capitalise the full $2·2 million.

    Once products have completed the development stage, Lincoln begins manufacturing them. At the year end it is
    anticipated that there will be significant levels of work in progress. In addition the company uses a standard costing
    method to value inventory; the standard costs are set when a product is first manufactured and are not usually
    updated. In order to fulfil customer orders promptly, Lincoln Co has warehouses for finished goods located across
    Europe and Asia; approximately one third of these are third party warehouses where Lincoln just rents space.

    In September a new accounting package was introduced. This is a bespoke system developed by the information
    technology (IT) manager. The old and new packages were not run in parallel as it was felt that this would be too
    onerous for the accounting team. Two months after the system changeover the IT manager left the company; a
    new manager has been recruited but is not due to start work until January.

    In order to fund the development of new products, Lincoln has restructured its finance and raised $1 million through
    issuing shares at a premium and $2·5 million through a long-term loan. There are bank covenants attached to the
    loan, the main one relating to a minimum level of total assets. If these covenants are breached then the loan
    becomes immediately repayable. The company has a policy of revaluing land and buildings, and
    the finance director has announced that all land and buildings will be revalued as at the year end.

    The reporting timetable for audit completion of Lincoln Co is quite short, and the finance director would like to
    report results even earlier this year.
    Required:

    b) Using the information provided, identify and describe FIVE audit risks and explain the auditor’s
    response to each risk in planning the audit of Abrahams Co.
    (10 marks)
    c) Describe substantive procedures you should perform to obtain sufficient appropriate evidence in
    relation to:

    i) Inventory held at the third party warehouses; and


    ii) Use of standard costs for inventory valuation.
    (4 marks)
    (20 marks)

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