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)