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.
1. Which of the following supplier balances would indicate a high risk in relation to the COMPLETENESS of the liability recorded at the year end?
A A supplier with a high balance at the year end and with a low volume of transactions during the year
B A supplier with a low balance at the year end and with a high volume of transactions during the year
C A supplier with a low balance at the year end and with a low volume of transactions during the year
D A supplier with a high balance at the year end and with a high volume of transactions during the year
2.Which of the following would correctly explain why the payables payment period has increased from 45 days in 20X7 to 66 days in 20X8?
A Chester Co received a prompt payment discount from one of its suppliers for the first time in 20X8
B Chester Co obtained a trade discount from one of its biggest suppliers which has reduced the amount owed to that supplier by 10% in the year
C Chester Co purchased an unusually high level of goods in July 20X8 to satisfy a large order and had not paid for those goods by the year end
D Chester Co took advantage of extended credit terms offered by a new supplier in respect of a large order which it had fully settled by the year end