Question 157- Rose

a) Trade payables and accruals

1. Inspect all purchase invoices received between 25 March and the year-end to ensure that
they have been correctly recorded in the 20x6 purchase ledger, as they were mistakenly posted
to the 20x7 ledger. It is important to find the error and accurately reflect the payables.
2. Request supplier statements for the year-end period and cross verify the outstanding
balances with recorded trade payables. It helps to identify any discrepancies between the
company’s records and supplier statements
3. Analyze all expenses incurred between 25 March and the year end to verify that costs related
to these invoices have been properly recognized in the 20x6 financial statements. It is essential
to ensure accurate expense matching.
4. Recalculate and confirm the year end accruals to ensure they are accurately presented in the
financial statements. This process validates that expenses are correctly matched with the
corresponding revenue for the reporting period.
5.Trace all payments made after the year end back to the corresponding invoices and accruals.
This confirms that these payments have been correctly allocated to the 20x6 accounting period.
6. Select a representative sample of invoices and trace them back to supporting documents,
such as purchase orders and delivery receipts to verify the authenticity and accuracy of these
invoices in the financial statements.

b) Receivables balances

1. Send confirmation requests directly to customers to verify outstanding balances as of year

end, especially those associated with the newly acquired group memberships. This helps to
confirm the accuracy of receivables.
2. Conduct an aging analysis of receivables, focusing on balances that have aged beyond the
normal terms and select a sample of these overdue accounts for detailed examination to identify
potential collectability issues.
3. Examine the terms and contracts related to the group memberships acquired during the year
to ensure proper recognition of revenue and receivables. This confirms that these memberships
are accurately reflected in the financial statements.
4. Examine the accounting treatment of advance payments made by members and ensure that
these advance payments are correctly recognized as deferred revenue and not included in the
trade receivable balance.
5.Test the recognition of revenue from monthly advance payments and confirm that revenue
recognition aligns with the timing of services provided and complies with accounting standards.

c) Reorganisation

1. Examine the minutes of the board meeting held in March where the reorganization plans
were agreed. Ensure that the decisions made and plans announced to shareholders on 29
March are consistent with the meeting minutes.
2. Confirm with relevant parties or external sources the disposition of surplus assets, such as
fitness equipment or properties as part of the reorganization plan and verify that these disposal
are accurately reflected in the financial statements.
3. Review the calculation of the reorganization provision proposed in the financial statements.
Ensure that it accurately reflects the expected costs associated with the reorganization including
refurbishments and staff retraining.
4. Evaluate whether any assets allocated for refurbishment or disposal should be tested for
impairment under accounting standards, to ensure that the carrying amounts of these assets
are not overstated.
5. Verify the accuracy of staff retraining costs included in the reorganization provision and
ensure that these costs are supported by appropriate documentation and are consistent with the
reorganization plan.

d) Written representations

1. Acknowledgment of responsibilities - Written representations ensure that management

acknowledges its responsibility for preparing financial statements and for the completeness of
information provided to the auditor. It is fundamental in maintaining accountability.
2. Communication of deficiencies- written representations may confirm that management has
communicated all deficiencies in internal controls known to them. This helps the auditor assess
the control environment and potential risks.
3.Support for audit evidence- they provide necessary support for other audit evidence relevant
to the financial statements or specific assertions. It is especially important in areas where the
auditor relies on managements’ explanations.
4. Written representations are typically in the form of a letter, which is drafted by management
and directed to the auditor. The auditor may request this letter from management.
5. During the audit, the team identifies areas where obtaining written representations may be
necessary and later in the final review stage, the auditors compile these representations. After
review by directors, they sign the representations ensuring that they are current as of the date ,
when the auditor’s report is issued

Question 158- Hyacinth

a) Inventory valuation

1. Review the inventory count records from year-end count, ensuring that controls and
processes for recording work in progress and finished goods were followed. It helps to confirm
the accuracy of the physical count.
2. Given the specific issue with the Crocus product line, examine the documentation related to
the rejected batch, evaluate the cost of production (450’000$) and assess the finance director’s
assertion that it can be still sold at a discounted price of 90’000$
3.Review sales contracts and agreements related to the potentially non-compliant inventory.
Ensure there are alternative sales agreements in place that support the director's claim of
selling the inventory at a discounted price.
4.Recalculate the overall inventory valuation, taking into account any adjustments related to the
rejected batch and the potential discounted selling price and ensure that the inventory is valued
in accordance with applicable accounting standards.
5.Examine quality control reports to understand the reasons behind the rejection of the Crocus
batch and ensure that rejection was legitimate and that the inventory was correctly categorized
as unsellable at its original cost.
6. Consider the need for an allowance for obsolescence in the valuation of inventory especially
for items that may have technical issues and evaluate management’s assessment of the
recoverability of the full cost of inventory.

b) Research and development

1. Examine the intangible asset register to identify and assess the opening balance of intangible
assets (1.9m$) and verify that it includes only these costs that meet the recognition criteria
under IAS38. It is to verify that only eligible R&D costs have been capitalized as intangible
assets, ensuring compliance with accounting standards.
2. Analyze the research and development expense records for the current year especially
focusing on 0.8m$ spent on developing 3 new products and ensure that these expenditures are
appropriately capitalized as intangible assets if they meet the recognition criteria to confirm that
R&D expenditures are correctly recognized as assets.
3. Assess the amortization calculation for the intangible assets and verify that the amortization
policy is consistent with past experience regarding the useful lives of the product and that it is
applied on a straight line basis over 4 years once production commences to ensure that the
amortization is consistent with the company’s policy and past experience.
4. Review any impairment assessment made by management on the intangible assets and
assess whether there are indicators of impairment and whether the CA of these assets exceeds
their recoverable amount to check for potential impairments.

c) Sales tax liability

1. Review the company’s sales tax returns and payments for the quarter ended 31 March 20x5
and verify the accuracy of reported sales tax liabilities against the company's records to ensure
compliance with tax regulations and confirm that the company is giving the correct amount to
the tax authority.
2. Perform reconciliation of the sales tax payable account in the financial statements to the
detailed records of sales tax charged on products sold and sales tax incurred on purchases. It
helps identify any discrepancies or errors in reporting, ensuring the completeness and accuracy
of the liability.
3. Request and examine documentation, such as invoices for sales and purchases to verify the
correctness of sales tax charged and paid on individual transactions and ensures that any
reclaimable taxes are properly accounted for.
4. Review correspondence and communication with the tax authority to confirm that the
company is in compliance with the reporting and remittance deadlines. It is to ensure that
Hyacinth Co is meeting its legal obligations and avoids penalties for late or incorrect
submissions.

d)

1. Yes, the 20x5 financial statements of Hyacinth Co should be amended to recognise the
material loss resulting from the flood. It is necessary to accurately reflect the company’s
financial position and performance for the period, if not then the financial statements would be
misstated providing an incomplete and misleading view to the stakeholders.
2. -Evaluate management's assessment of the flood damage, including their estimation of
losses and the likelihood of insurance claim to ensure that management’s conclusions are
reasonable and in compliance with accounting standards.
-Request and examine supporting documents related to the flood event such as incident
reports, repair invoices and communication with insurance providers to verify the occurrence
and extent of damage confirming the need for an amendment.
-Evaluate whether management has appropriately accounted for the flood related losses in the
financial statements and ensure that losses are recognized as expenses or impairments where
necessary and that appropriate disclosures are made to inform stakeholders about the event’s
impact on the financial statements.