Q No.6: On October 21, Rank & Brink, a CIA firm, was retained by Suncraft Applia
ID: 349984 • Letter: Q
Question
Q No.6:On October 21, Rank & Brink, a CIA firm, was retained by Suncraft Appliance Corporation to perform an audit for the year ended December 31. A month later, James Minor, president of the corporation, invited the CIA firm’s partners, George Rand and Alice Brink, to attend a meeting off all officers of the corporation. Mr. Minor opened the meeting with the following statement:
“All of you know that we are not in a very liquid position, and our October 31 balance sheet show it. We need to raise some outside capital in January, and our December 31 financial statements (both balance sheet and income statement) must look reasonably good if we’re going to make a favorable impression upon lenders or investors. I want every officer of this company to do everything possible during the next month to ensure that, at December 31, our financial statements look as strong as possible, especially our current position and our earnings.”
“I have invited our auditors to attend this meeting so they will understand the reason for some year-end transactions that might be a little unusual. It is essential that our financial statements carry the auditors’ approval, or we’ll never be able to get the financing we need. Now what suggestions can you offer?”
The vice president for sales was first to offer suggestions: “I can talk some of our large customers into placing some orders in December that they wouldn’t ordinarily place until the first part of next year. If we get those extra orders shipped, it will increase this year’s earnings and also increase our current assets.”
The vice president in charge of production commented: “We can ship every order we have now and every order we get during December before the close of business on December 31. We’ll have to pay some overtime in our shipping department, but we’ll try not to have a single unshipped order on hand at year-end. Also, we could overship some orders, and the customers wouldn’t make returns until January.”
The controller spoke next: “If there are late December orders from customers that we can’t actually ship, we can just label the merchandise as sold and bill the customers with December 31 sales invoices. Also, there are always some checks from customers dated December 31 that don’t reach us until January- some as late as January 10. We can record all those customers’ checks bearing dates of late December as part of our December 31 cash balance.”
The treasurer of offered the following suggestions: “I owe the company $50,000 on a call note I issued to buy some of our stock. I can borrow $50,000 from my mother-in-law about Christmas time and repay my note to the company. However, I’ll have to borrow the money from the company again early in January, because my mother-in-law is buying an apartment building and will need the 50,000 back by January 15.”
“Another thing we can do to improve our current ratio is to write checks on December 31 to pay most of our current liabilities. We might even wait to mail the checks for a few days or mail them to the wrong addresses. That will give time for the January cash receipts to cover the December 31 checks.”
The vice president of production made two final suggestions: “Some of our inventory, which we had tentatively identified as obsolete, does not represent an open-and-shut case of being unsalable. We could defer any write-down until next year. Another item is some machinery we have ordered for delivery in December. We could instruct the manufacturer not to ship the machines and not to bill us before January.”
After listening to these suggestions, the president James Minor spoke directly to Rand and Brink, the auditors. “You can see I’m doing my best to give you full information and cooperation. If any of these suggested actions would prevent you from giving a clean bill of health to our year-end statements. I want to know about it now so we can avoid doing anything that would keep you from issuing an unqualified audit report. I know you’ll be doing a lot of preliminary work here before December 31, but I’d like for you not to bill us before January. Will you please give us your reactions to what has been said in this meeting?”
Required:
a. Put yourself in the role of Rand & Brink, CIAs, and evaluate separately each suggestion made in the meeting. What general term is applicable to most of the suggested actions?
b. Could you assure the client that an unqualified audit report would be issued if your recommendations were followed on all the matters discussed? Explain.
c. Would the discussion in this meeting cause you to withdraw from the engagement?
Explanation / Answer
Put yourself in the role of Rand & Brink, CIAs, and evaluate separately each suggestion made in the meeting. What general term is applicable to most of the suggested actions?
Could you assure the client that an unqualified audit report would be issued if your recommendations were followed on all the matters discussed? Explain.
Would the discussion in this meeting cause you to withdraw from the engagement?
Liquidity management: - as said the company is facing some liquidity constraints. Since the company is enjoying the overall good financial position i.e long term solvency position. Therefore, the company can go far short term long to fulfill working capital requirements. Some of the other issue on which company should work upon is given
Company should work on the conversation rate i.e company should see the nature of current assets in balance sheet of the company and what are the main reason that such current assets are taking a lot of time while conversation into cash
Company should analyze and categories the potential clients on the basis of bulk purchase as well as the recovery period from each client. Clients who make advance of payments within the deadline must motivate by specila offers.
Company should prioritize which asssests are productive and which are not. If the assests are occupying the space in the balance sheet but of no worth anymore. Then such assists don’t deserve space in your balance sheet i.e sales of such assest
Company should analyse and classify the nature of potential suppliers also. The suppliers who are giving good discount compounded with larger credit period. The company should go for such suppliers where we can make a payment late or delay the payment
The company can also go for external consultancy service if they are finding difficults in forecasting expected cash inflows and outflows in the shorts as well as long run of the business
Timely payment of current liabilities if possible.
Timely recovery of payments from current assests if possible like in this case recovery from the treasurer of $50000 is possible
Sale management
Vice president of sales is able to tap the potential customer at apotential time period which would have favorable impact on the economic efficiency of the company as well as liquidity. Some of the key issues which must get due attention are given below
The manager should prioritise the nature of discount given below
The manager should coordinate with the non routine demand with the head of the production department so, the necessary arrangement are made by the production department
Production managhement:
The overall liquidity and productive position of the company cannot be favourable unless or until appropriate sales are not made and appropriate sales simply depend on the production process. Some of the key issue with regards to production department
Vice president in charge of production must analyze the quantity of raw material along with cost involment in the case of sudden demand of long term December
Vice president in charge of production must analyse the availability of labour along with cost involment in the case of sudden demand of long term customer in December. If labour is not available then at what cost the company should pay for overtime
Purchase department: since the purchase of machinery involve a hefty amount of cost therefore the manager should see the immediate requirement of the machinery. If there is no emergenvcy and old plant and machinery are servimg the current purpose of sales generation .
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