The following scenario relates to questions 1–5
Chester Co manufactures and sells pet toys to the wholesale market. It has prepared its financial statements to 31 July 20X8. You are an audit assistant with Durham & Co and you have been assigned the current liabilities balances in the audit work plan.
You have calculated the payables payment period to be 66 days in 20X8 (45 days in 20X7) and have asked the directors of Chester Co to provide an explanation as to the increase in days.
Chester Co receives monthly statements from its main suppliers and performs regular supplier statement reconciliations.
There were inconsistencies noted in respect of the following at 31 July 20X8:
Supplier Balance per Balance per
purchase ledger supplier statement
Oxford Co 151,480 296,120
Poole Co (72,168 ) 84,235
Bath Co 82,348 92,340
Chester Co has a credit agreement with Oxford Co under which it receives goods 14 days before the supplier raises the invoice. Chester Co received goods worth $144,640 on 18 July 20X8 for which the invoice was received shortly after the year end in accordance with the agreement. Chester Co entered the transaction into its accounting records at the date of invoice.
The difference on this balance has still to be investigated.
Chester Co’s finance director has informed you that there was an error in closing the purchase ledger and it was closed three days early. Invoices received 29, 30 and 31 July 20X8 were posted to the 20X9 ledger. The directors of Chester Co have confirmed that following the discovery of this error, a manual adjustment was made using the journal book.
3.Which of the following is an appropriate action in respect of the inconsistency in the balance with Oxford Co?
A The auditor should take no further action as this is a timing difference which was resolved upon receipt and posting of the invoice
B The auditor should request that the purchase ledger balance is amended at the reporting date to reflect the recent invoice
C The auditor should contact the supplier and request a supplier statement as at the current date
D The auditor should request that an accrual is created in respect of the goods received but not yet invoiced
4. Which of the following would be a valid explanation for the difference in respect of Poole Co?
(1) An invoice for $156,403 has been paid twice
(2) An invoice for $156,403 has been posted as a debit note
(3) An invoice for $156,403 has been received and processed prior to receipt of the goods
A 1 only
B 1 and 2 only
C 2 and 3 only
D 1, 2 and 3