ACC311 Fundamentals of Auditing Assignment 2 Solution Fall 2012

Wood Work Furniture (WWF) is a leading manufacturer in furniture industry of Pakistan with eight showrooms located in big cities. The company since its incorporation in 2002 is listed at KSE. WWF manufactures furniture in two verities – Wood Furniture and Plastic Furniture. In the previous audit, the company auditor was satisfied with the control over physical existence, maintenance and valuation of the inventory. The company entered into the export business in 2010 by establishing 3 retail outlets in UAE. WWF also got audited the accounts of these outlets for the financial year 2011 by its principal auditors. During the audit, it was revealed that 30% of the company’s inventory was in UAE outlet stores. Further, the goal of expected sales has also not met in these foreign outlets. As a result, the inventory turnover ratio was much lesser as compare to Pakistani outlets. It was also revealed that the day’s sale in receivable has also been increased. In the financial year 2011, the cost of plastic furniture increased by 17% while that of wood furniture increased by 31%. The price of the plastic furniture decreased by 5% whereas, the price of wood furniture remains the same. The price of the UAE Currency had also been decreased by 9%, while the exchange rate at the time of export was Rs. 25 per UAE Dirham. The carrying cost was increased in year 2011 by 13%. The located place for the inventory in ware house is equally divided in the ratio of 3:1 for the wood and plastic inventory but currently the wood inventory alone requires the 85% space in the warehouse. The auditor showed his concern regarding the risk of material misstatement found in the value of inventory at UAE due to the involvement of foreign currencies, i.e. the foreign exchange transactions and cost of exporting the goods.
REQUIRED: 1. Is the foreign currency risk identified by the auditor is justifiable and why? (5) 2. In the given scenario what type of audit procedure the auditor should adopt for testing the control procedures developed by WWF to control its sales and debtors? (10) 3. Suggest WWF the ways, techniques and methods to manage its inventory and receivables efficiently.