b. When Jack walked through LBE\'s giant finished goods warehouse, he noticed th

Question

b. When Jack walked through LBE's giant finished goods warehouse, he noticed that on the rack of row #56, many cartons were old and covered with dust. He stopped and asked about those cartons. Steve, the plant manager, told him that those are small appliances made in early 2014. Steve promises that eventually all the goods will be sold when LBE gives some price incentives to his distributors.

c. Joe is an experienced cost accoutant on your team. Joe reviewed LBE's cost accounting system which generates unit production costs for different products. He noticed that the costs of the firms electrical engineering department was treated as a periodic expense in previous fiscal years, but was treated as one source of manufacturing overheads in FY 2014.d

Question ... describe additional audit procedures that the audit team should perform in each situation. Please also highlight probably misstatements in LBE's financial statements.

Explanation / Answer

b. The additional Audit procedure should be the thorough review of non moving items. There must be a management representation regarding the Provision for Obsolete items to be taken and the Writing down of the FG stock at Lower of cost or market ( net realizable) value. The Inventory obsolescence and the related management action and provision should be the highlight pf the procedure.

The probable misstatement in LBE's financials will be;

1. Concerned FG stock may no be wriiten down to lower of cost & market

2. The Provision for obsolete inventory has not been made.

3. The Closing FG Inventory and the Profit of the year showing a higher than actual amount.

c. The Audit Procedure should be to review and compare yearly details of expense heads in Overhead and Period costs with the basic logic provided . The expense heads should be same unless there is a compelling business or technical reason to change the same with a management explanation available.

Possible misstatement may be the smoothening of income . In previous year profitability could have been shown less by charging off electrical engineering department costs as period costs and this year the profitability could be enhanced by showing electrical engineering department costs as part of overhead and carrying forward some part of that cost with the closing inventory.

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