You are the manager-in-charge of the annual audit of Long Beach Electronics, Inc

Question

You are the manager-in-charge of the annual audit of Long Beach Electronics, Inc. which makes small appliances for the California market. When your audit team audits LBE's inventory, your staff experienced the following issues:

a. Jack, the senior auditor in charge of inventory observation, notice that on the inventory observation date, 4 trucks were parked at the shipping dock, fully loaded with some appllance products from the finished goods warehouse. LBE's assistant controller told Jack that those are items ready to be shipped to Tal-mart, its largest customer. The goods on the trucks wer not included in the ending inventory.

b. When Jack walked through LBE's giant finished goods warehouse, he noticed that on the rack of row #56, many cartons were old and covered with dust. He stopped and asked about thos cartons. Steve, the plant manager, told him that those are small appliances made in early 2014. Steve promises that eventually all the goods will be sold when LBE gives some price incentives to its distributors.

c. Joe is an experienced cost accountant in your team. Joe reviewed LBE's cost accounting system which generates unit production costs for different products. He noticed that t exphe costs of the firm's electrical engineering department was treated as a periodic expense in previous fiscal years, but was treated as one source of manufacturing overheads in FY 2014.

Describe additional audit procedures that the audit team should perform in each of the situations. Please also highlight probable misstatements in LBE's financial statements.

Explanation / Answer

Auditors must investigate how they are accounting ending inventory. In detail, the auditors must determine which inventory method FIFO, LIFO and weighted average method is used. The basis and under valuation or overvaluation or any other misstatement must be clearly determined.

While, Jack, senior auditor in charge of the annual audit, he noticed a very valuable point that these goods are not included in the ending inventory. Until unless the goods reached to the destination of the buyer (when FOB destination terms is in consideration), the vendor cannot transfer these goods from ending inventory to cost of goods sold which is missing in this case.

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