Case Study - Auditing

CASE STUDY1
Sleeptight
You are an audit senior for Mills & Co and are in the process of planning the audit of
Sleeptight Co, which has been an audit client of Mills & Co for several years.
Sleeptight’s principal activity is the manufacture and sale of expensive high quality beds.
Each bed is crafted by hand in the company’s workshop, and personalised in accordance
with each customer’s requirments.
The shares in Sleeptight are owned by the two joint Managing Director who are sisters,
Anna and Sophia Jones. Both have a number of other business interests. As a result, they
only spend a few days a week working at the company and only rely on the small
accounts department to keep the finances in order and to keep them informed. There is no
finance director but the financial controller is qualified accountant.
Sleeptight required customers who palce an order to pay a deposit of 40% of the total
value at the time the order is placed. The beds will take 4 to 8 weeks to built, and
remaining 60% of the order value is due within a week of the final delivery. Risks and
rewards of ownership of the beds do not pass to the customer until the beds are delivered
and signed for. Beds also come with a two year guarantee and the financial controller has
made a provision in respect of the expected costs to be incurred in relation to beds still
under guarantee.
The company undertake a full count of raw matrrials at the year end. The quantities are
recorded on inventory sheets and the financial controller assigns the costs based on the
costs assigned in the previous year or, if there was no cost last year, using the latest in
voice. Most beds are made of oak or other durable woods and the cost of these raw
materials is known to fluctuate considerable.
Its expected that work in progress will be insignificant this year, but there will be a
material amount of finished goods awaiting dispatch. Anna will estimate the value of
these finished goods and has said she will take into account the order value when doing
so.
Required:
1. Describe five audit risks

2. Explain the auditor’s response each risk in planning the audit of Sleeptight Co.
1
CASE STUDY 2
Smothbush
Smothbrush Paint Co is a paint manufacture and has been trading for over 50 years. It
operates from one central site, which includes the production facility, warehouse and
administration offices.
In recent years, Smothbrush has reduced the level of goods directly manufactured and
instated started to import paint form South Asia. Approximately 60% is imported and
40% manufatured. Within the production facility is a large amount of old plant and
equipment thai is now redundant and has minimal scrap value. Purchase orders for
overseas paint are made six months in advance and goods can be in transit for up to two
months. Smoothbrush accounts for inventory whem it receives the goods.
To avoid the disruption of a year end inventory count, Smoothbrush has this year
instroduced a continuous/perpeptual inventory counting system. The warehouse has been
divided into 12 areas and these are each to be counted once over year. The counting team
includes a member of the internal audit department and a warehouse staff member. The
following procedures have been adopted.
1. The team prints the inventory quantities and descriptions from the system and
these records are then compared to the inventory physically present
2. Any discrepancies in relation to quantities are noted on the inventory sheets
(which are printed including the expected quantities), including any items not
listed on the sheets but present in the warehouse area.
3. Any damaged or old items are noted and they are removed from the inventory
sheets.
4. The sheets are then passed to the finance department for adjustments to be made
to the records when the count has finished.
5. During the counts there will continue to be inventory movements with goods
arriving and leaving the warehouse.
At the year end it is proposed that the inventory will be based on the underlying records.
Required:
Identify and explain suitable controls that should operate over the perpetual inventory
counting systems, to ensure the completeness and accuracy of existing inventory records
at Smothbrush Paints Co.
2
CASE STUDY 3
Newthorpe
You are auditing the financial statements of Newthorpe Engineering Co, a listed
company, the year ended 30 April 20X7.
In March 20X7 the Board decided to close one of the company’s factories on 30 April
20X7. The plant and equipment and inventories will be sold. The employees will either be
transferred to another factory or made redundant.
At the time of your audit in June 20X7, you are aware that:
(i) Some of the plant and equipments has been sold

(ii) Most of the inventories have been sold
(iii) All the employees have either been made redundant or transferred to another
factory
The company has provided you with a schedule of the closure costs, the realisable values
of the assets in (i) and (ii) above and the redundancy cost.
Details of the plant and machinery are maintained in a non-current asset register.
A full inventory count was carried out at 30 April 20X7. Audit tests have confirmed that
the inventory counts are accurate and there are no purchases or slaes cut-off errors.
You are aware the redundancy payments are based on the number of years services of the
employee and their annual salary. Most employees were given redundancy of one week’s
pay for each year’s service. A few employees have a service contract with the company
and were paid the amount stated in their contract which will be more than the redundancy
pay offered to other employees. Employees who are transferred to another factory were
not paid any redundancy.
As part of the audit of the closure cost, you have been asked to carry out the audit work
described below.
Required:
For the factory being closed, describe the audit procedures you will carry out to vertify
the company’s estimates of:
(a) The net realisable value of plant and equipment

(b) The inventories
(c) The redundancy cost
3
Notes:
- In auditing inventories, you are required only to verify that the price per unit is
correctly determined
- For redundancy cost, you should ignore any national statutory rules for
determining redundancy procedures and minimum redundancy pay

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CASE STUDY1

1. Describe five audit risks

(i) Some of the plant and equipments has been sold

(a) The net realisable value of plant and equipment

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