business-reporting-july-2010-marks-plan

Test standard prices against sample of invoices

Info icon This preview shows pages 19–21. Sign up to view the full content.

View Full Document Right Arrow Icon
Test standard prices against sample of invoices Review inventory records against inventory count information or continuous inventory records
Image of page 19

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
TI BR – Advanced Stage – July 2010 © The Institute of Chartered Accountants in England and Wales 2010 20 Enquire whether significant discounts have been made which may explain the shortfall. Determine conditions for discounting and relevant authorization enquiries from invoice sample. 70% of sales are overseas and denominated in euro. The standard price is fixed in euro at the beginning of the year as equivalent to the £, but exchange rate movements during the year may have caused a change. As a consequence, the actual revenue may have moved out of line with the predicted revenue based in £s. Review exchange rate movements and examine whether the translation is at the actual or average £/euro exchange rate. (This test also applies to each category of cost.) Note 2 - Cost of Sales Cost of sales of the Monty declined by 14%. Cost of sales of the Gold declined by 34%. Using the quantity data provided by Claire, a significant fall in cost of sales would have been anticipated due to reductions in total variable costs. The reduction in cost of sales would however be expected to be smaller in percentage terms than the reduction in revenues as this is a manufacturing company and hence some costs are fixed. This fixed element of costs therefore does not change despite the fall in volumes. The predicted values of cost of sales are: Monty (£4m x 9/12) + (9,000 units x £840 x 50%) = £6.78m The actual cost of sales of Monty is £6.7m which is extremely close to the predicted level and therefore provides some assurance. Gold (£12m x 9/12) + (6,000 units x £2,520 x 50%) = £16.56m The actual cost of sales of Gold is £15.5m which is a difference of 6.8% and may represent a risk of material understatement of cost of sales if the understatement is due to errors and omissions. It is not clear from the data whether the cost saving arises from lower variable cost per unit or fixed costs savings but this requires further investigation. Audit work While the percentage difference is smaller for cost of sales than for revenue it may be more concerning as exchange rates do not appear to an explanatory factor as manufacturing is in the UK. However installation costs and the sales network are incurred in euro so the exchange rate effect is not entirely to be ignored. As cost of sales and revenues are both lower than anticipated this may be a consistent explanation. Agree the total fixed costs being incurred against budget assumptions Review the method of allocation of fixed production costs as given the seasonal nature of the businesses then if the allocation is on a time basis, rather than a normal usage basis, this may distort the costs allocated to cost of sales and inventory.
Image of page 20
Image of page 21
This is the end of the preview.