Auditing work Harvard Case Solution & Analysis

Auditing work Case Solution

Audit of Wu Industries

A. Proposed Adjusting Entries:

1. The credit memos are issued by the company to its customer on sales return. The credit memo is issued against the sales invoice, which decreases the amount owed by the customer. Two credit memo entries are unadjusted by the company, the total amount of the un adjusted credit memo entries are $47,862 belonging to the sales of the year 2014. The entries should be carried out for these credit memos by debiting the sales and crediting the account of the customer.
2. Inventory cut-off test during audit shows that theinventory received in the year ending 31 December 2015 is not recorded in the purchases and account payables for the year 2015, these entries were recorded in 2016 instead, howeverthe inventory account was correctly updated by this entry. The management of the company should adjust this purchase of inventory and also payables and post the entries in the purchases and payables of the year 2015. This will increase the purchases account and account payables by $18,631.
3. The sales of the goods have been recorded in 2015, howeverthe delivery of the goods from the company warehouse has been carried out in 2016. IAS 18 clearly explains that the revenue can only be recognised by the company if and only if all the risks and rewards related to the goods sold are transferred from seller to buyer. As far as the inventory is under the company, the company cannot recognise the revenues as the risks and rewards are not transferred to buyer. Therefore, the sales of the year 2015 should be debited by $38,742 and the inventory should be debited by $23,915.
4. Only writing the checks do not require the entries in cash and account payables, however the checks are sent to the customer then the company should debit the account payables and credit the bank account.
5. Deferred revenue is recorded after the advance payment by the customer for whom the company has not sent goods or given services; it is also called unearned revenue. The entry to mitigate the understatement of deferred revenue should be done by crediting deferred revenue and debiting revenue by $15,000.
6. The allowance for the uncollectible accounts should be debited by the average of $30000 and $50000 to adjust the understatement of the account.
7. Non-statistical sampling shows the overstatement of an item by a net of $2,671, this has overstated the inventory by $28,946; the company should credit the inventory account by this amount.

B. Why Wu Industries’ management may resist making these adjustments:

The management of the Wu Industries may resist making the entries of credit memos, as the adjustment will decrease the sales of the company by $47,862 and the management might be reluctant to decrease the revenue.
The management may refuse to adjust second entry and to increase the purchases and the account payables as this will increase the cost of goods, thus decreasing gross margins and the increase in the payables will affect the current ratio of the company adversely.
Third entry will also decrease the sales figure of the company because the company has recorded the sales for the goods in 2015, which are in the inventory and are not transferred to the customers until 2016.
Finally, the deferred revenue and the allowance for uncollectible accounts affect the revenue and expenses of the company respectively, thus these will decrease the profit of the company which is why the management may be reluctant to make the adjustment....................

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