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Lobj19 - 0000044 CR 1907 Q PDF
Lobj19 - 0000044 CR 1907 Q PDF
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K to £
30 April/1 May 20X3 2.5
1 November 20X3 2.6
1 February 20X4 2.0
30 April 20X4 2.1
Average rate for year to 30 April 20X4 2.0
Exhibit: Unresolved financial reporting and audit issues – prepared by Gary Kant
(1) Pension obligation
Hoop operates a defined benefit pension scheme for its employees, although the scheme was closed
to new employees three years ago. Employees in the scheme are required to make contributions. I
have completed the audit procedures on the scheme assets, valued at £19.4 million at 30 June 20X4,
and these have been reviewed. The scheme assets at 30 June 20X3 also had a value of £19.4 million.
In respect of pension obligations, however, my audit procedures are incomplete. I have agreed the
present value of the obligations with the actuary appointed by RN. I have also verified the cash
contributions and the benefits paid to supporting documentation. I have not, however, had the chance
to carry out any audit procedures in respect of the service costs, past service costs or interest costs. I
am concerned about this as Hoop improved the pension benefits to all existing employee members of
the scheme on 1 July 20X3, based on their historic service with Hoop.
The only entries made by Hoop during the year are in respect of the employer pension contributions
and these payments have been treated as an expense.
Annual market yield on high-quality corporate bonds with a similar maturity date:
At 30 June 20X3 4%
At 30 June 20X4 5%
The current service cost accrues evenly throughout the year. The contributions and benefits are paid
on the 15th of each month during the year.
(2) Change of accounting policy – inventories
The Hoop directors have informed me that they wish to change the accounting policy for inventory
measurement from first-in first-out (FIFO) to weighted average cost. Closing inventories measured for
the years ended 30 June under the two different methods are as follows:
20X3 20X4
£'000 £'000
FIFO 785 795
Weighted average cost 782 786
I am concerned about the impact on profit of the change in the accounting policy for the year ended 30
June 20X4 and I am unsure about the audit procedures I need to perform in respect of this issue.
(3) Revenue recognition
Larger customers who order significant volumes of non-perishable produce require a production run
which is specific to them. In the past, some of these customers have changed their minds after
production has commenced and Hoop has been left with inventories which it cannot sell.
As a result, Hoop has introduced new contract terms. These require customers to pay a 20% cash
deposit before commencement of production in order to reduce the risk of obsolete inventory.
At 30 June 20X4, an order for packaged foods produced for a large customer, DistribFoods plc, had
been completed under these new contract terms. 30% of the goods, by value, were still in inventory at
30 June 20X4, while the remainder had been delivered to the customer on 14 June 20X4.
On 19 May 20X4 a 20% deposit of £90,000 was received by Hoop from DistribFoods for the entire
order. Hoop recognised this £90,000 as revenue at that date, but did not recognise any other revenue
for this contract in the year ended 30 June 20X4. The production cost to Hoop of this contract was
£200,000, which has been recognised, in full, in cost of sales in the year ended 30 June 20X4.