Revenue Recognition - IFRS 15 - introduction 29 / 41

Sample
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Question 5a i

You are a manager at Thyme & Co, a firm of Chartered Certified Accountants. You are currently involved in the completion stage of two engagements relating to different clients. Both engagements have raised issues that require your attention.

(a) Rocket Co is a listed client operating in the engineering industry. The company manufactures machinery for use in the aircraft, defence and marine sectors. The audit for the year ended 30 April 2017 is almost complete. The revenue and profit before tax figures recognised in the draft financial statements are $1,437 million and $139 million, respectively (2016 – $1,489 million and $175 million respectively).

Audit procedures identified two sales transactions in the final quarter of the year that related to two different customers but where the goods were delivered to the same location. Further investigations revealed that the goods were delivered to a third party, who agreed to store them until the customers were ready to receive delivery. The goods have yet to be delivered to the customers because they are both building new facilities and neither is sufficiently progressed to receive the new machinery. The contract terms explicitly state that Rocket Co is obliged to deliver the goods to the customers for final inspection and acceptance and the client has not agreed to any consequent amendments to these terms. The sales invoices were raised and the revenue recognised upon despatch of the goods to the storage facility. During discussions with the audit team, the finance director stated that the company had fulfilled its contractual obligations to provide the goods by a specified date. The revenue attributable to the two transactions totalled $17 million.

Required:
(i) Comment upon the matter described above and explain the further actions necessary before the auditor’s report can be signed. (7 marks)

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Question 2b i

Kowloon Co works on contracts to design and manufacture large items of medical equipment such as radiotherapy and X-ray machines. The company specialises in the design, production and installation of bespoke machines under contract with individual customers, which are usually private medical companies. The draft financial statements recognise profit before tax of $950,000 and total assets of $7·5 million.

The audit senior has left the following note for your attention:

‘One of Kowloon Co’s major customers is the Bay Medical Centre (BMC), a private hospital. In June 2015 a contract was entered into, under the terms of which Kowloon Co would design a new radiotherapy machine for BMC. The machine is based on a new innovation, and is being developed for the specific requirements of BMC.

It was estimated that the design and production of the machine would take 18 months with estimated installation in December 2016. As at 31 December 2015, Kowloon Co had invested heavily in the contract, and design costs totalling $350,000 have been recognised as work in progress in the draft statement of financial position. Deferred income of $200,000 is also recognised as a current liability, representing a payment made by BMC to finance part of the design costs. No other accounting entries have been made in respect of the contract with BMC.

As part of our subsequent events review, inspection of correspondence between Kowloon Co and BMC indicates that the contract has been cancelled by BMC as it is unable to pay for its completion. It appears that BMC lost a significant amount of funding towards the end of 2015, impacting significantly on the financial position of the company. The manager responsible for the BMC contract confirms that BMC contacted him about the company’s financial difficulties in December 2015.

The matter has been discussed with Kowloon Co’s finance director, who has stated that he is satisfied with the current accounting treatment and is not proposing to make any adjustments in light of the cancellation of the contract by BMC. The finance director has also advised that the loss of BMC as a customer will not be mentioned in the company’s integrated report, as the finance director does not consider it significant enough to warrant discussion.

Kowloon Co is currently working on six contracts for customers other than BMC. Our audit evidence concludes that Kowloon Co does not face a threat to its going concern status due to the loss of BMC as a customer.’

Your review of the audit work performed on going concern supports this conclusion.

Required:
(i) Comment on the matters to be considered, and recommend the actions to be taken by the auditor; and (7 marks)

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Question 2b ii

Kowloon Co works on contracts to design and manufacture large items of medical equipment such as radiotherapy and X-ray machines. The company specialises in the design, production and installation of bespoke machines under contract with individual customers, which are usually private medical companies. The draft financial statements recognise profit before tax of $950,000 and total assets of $7·5 million.

The audit senior has left the following note for your attention:

‘One of Kowloon Co’s major customers is the Bay Medical Centre (BMC), a private hospital. In June 2015 a contract was entered into, under the terms of which Kowloon Co would design a new radiotherapy machine for BMC. The machine is based on a new innovation, and is being developed for the specific requirements of BMC.

It was estimated that the design and production of the machine would take 18 months with estimated installation in December 2016. As at 31 December 2015, Kowloon Co had invested heavily in the contract, and design costs totalling $350,000 have been recognised as work in progress in the draft statement of financial position. Deferred income of $200,000 is also recognised as a current liability, representing a payment made by BMC to finance part of the design costs. No other accounting entries have been made in respect of the contract with BMC.

As part of our subsequent events review, inspection of correspondence between Kowloon Co and BMC indicates that the contract has been cancelled by BMC as it is unable to pay for its completion. It appears that BMC lost a significant amount of funding towards the end of 2015, impacting significantly on the financial position of the company. The manager responsible for the BMC contract confirms that BMC contacted him about the company’s financial difficulties in December 2015.

The matter has been discussed with Kowloon Co’s finance director, who has stated that he is satisfied with the current accounting treatment and is not proposing to make any adjustments in light of the cancellation of the contract by BMC. The finance director has also advised that the loss of BMC as a customer will not be mentioned in the company’s integrated report, as the finance director does not consider it significant enough to warrant discussion.

Kowloon Co is currently working on six contracts for customers other than BMC. Our audit evidence concludes that Kowloon Co does not face a threat to its going concern status due to the loss of BMC as a customer.’

Your review of the audit work performed on going concern supports this conclusion.

Required:
(ii) Explain the audit evidence you would expect to find in your review of the audit working papers. (5 marks)

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