Question

Proposal For Performing a company's Annual Audit Case Study Obtaining Clients Facts. Furm you wany. (This mee in the mood tamily own The Audesturing comve experie a privatehofitable but Your firm has turing company has been prompany info The manufacturing compananufacturing they also do rato tells The Audit Firm you work for has the opportunity to submit a proposal for an annual audit of a manufacturing company. (This manufacturing company has never been audited) Your firm has extensive experience in the manufacturing industry. The manufacturing company is a privately held family owned business. The manufacturing company has been profitable but has significant bank debt. The management of the manufacturing company informs you that they value their inventories using the next-in first-out method and they also do not believe companies should record an allowance for doubtful accounts. The management also tells you that you will only be selected as the audit firm if you agree with their treatment of inventories and the allowance for doubtful accounts in the audited financial statements. • Your research shows that the next-in first-out method of valuing inventories is not in accordance with Generally Accepted Accounting Principles; also, GAAP requires use of an allowance for doubtful accounts Issue: Should your Audit Firm pursue getting this client? Why or why not? able as the ats in the audis that the renting P accouresearch shecepted

Answer 1

Stock valuation :

As per Generally Accepted Accounting Principles, proper Stock Valuation method should be followed for true and fair view of the financial statements i.e. Balance sheet and Profit and loss account. Inventory valuation is the monetary amount associated with the goods in the inventory at the end of accounting period.

Next In-First out method ofr valuation of closing stock does not give the correct profit of the enterprise as the last purchase items will be purchased at a higher price than the first one.If the inventory cost are highly moving up and down or likely to increase in the future , this method should follow.

However, First in First Out - FIFO method is the best method for the valuation of inventory as it assumes the older items purchased at a lower cost will be sold first.

Provision for doubtful account :

A provision is a loss/expenses that will definitely occur in the near future.Usually the business decides the percentage of the provision for doubful debts and hence it is considered as a liability.

Any loss to be anticipated in the future must be accounted in the books of the accounts on conservatism basis. and hence if the company does not want to provide provision in the statements, the auditor must qualify his report.

Conclusion :

By following Next-in First Out method.the auditor must identify the difference in the valuation of inventory if the same has been valued under FIFO basis and what would happen to the profit of the enterprise and include the same in his report.

In the same manner, the auditor must qualify his report by the effect of non-provision of the doubtful accounts on the profitability of the enterprise.