Zilpha Fashion shops PLC own a chain of high
fashion shops in major towns. Each shop is operated by a separate subsidiary company.
All subsidiaries buy from the parent. The auditors of the Covhampton shop are
reviewing the accounts
fashion shops in major towns. Each shop is operated by a separate subsidiary company.
All subsidiaries buy from the parent. The auditors of the Covhampton shop are
reviewing the accounts
for the year ending 31.1.x7 before starting the audit.
These reveal (in extract):
(all in £’000) 20-6 20-7 budget 20-8
Turnover 600 638 640
Cost of sales 400 459 425
Gross profit 200 179 215
Wages
78
71
70
78
71
70
Overheads 70 75 74
Net profit 52 33 71
Stock 58 53 62
Creditors 71 79 74
External data known to the auditors includes:
·
Rate of
inflation – 5 percent;
Rate of
inflation – 5 percent;
·
A
university survey, found on the internet, of the traders in the precinct in
which the shop is situated indicates a 5 per cent growth in real terms;
A
university survey, found on the internet, of the traders in the precinct in
which the shop is situated indicates a 5 per cent growth in real terms;
·
The rate
of gross profit achieved by other shops In the group was 34 per cent and
average stock was 45 days’ worth;
The rate
of gross profit achieved by other shops In the group was 34 per cent and
average stock was 45 days’ worth;
·
Creditor
days in three other shops averaged 65days;
Creditor
days in three other shops averaged 65days;
·
Wages in
other shops averaged 13 per cent of turnover
Wages in
other shops averaged 13 per cent of turnover
From all this data, the auditors could:
·
Compute
estimated turnover as 600 x 1.05 = 661. The actual turnover is significantly
less. The difference must be investigated.
Compute
estimated turnover as 600 x 1.05 = 661. The actual turnover is significantly
less. The difference must be investigated.
·
Gross
profit from the turnover could be estimated as 638 x 0.34 = 217. Actual rate of
gross profit is only 28 per cent, resulting in a profit of only 179. This might
be explained by the drop in sales.
Gross
profit from the turnover could be estimated as 638 x 0.34 = 217. Actual rate of
gross profit is only 28 per cent, resulting in a profit of only 179. This might
be explained by the drop in sales.
·
Stock
should be about 45 days’ worth – 459 x 45/365 = 56. Actual rate is lower but
materially so.
Stock
should be about 45 days’ worth – 459 x 45/365 = 56. Actual rate is lower but
materially so.
·
Creditors
should be 459 x 65/365 = 82. This confirms the figure as the actual level of
creditors is not materially different.
Creditors
should be 459 x 65/365 = 82. This confirms the figure as the actual level of
creditors is not materially different.
·
Wages
perhaps ought to be 638 x 0.13 = 83. If the direction of causation was reversed
turnover should be 71 x 100/13 =546. Wages do agree with budget and should be confirm-able by considering the numbers on the staff.
Wages
perhaps ought to be 638 x 0.13 = 83. If the direction of causation was reversed
turnover should be 71 x 100/13 =546. Wages do agree with budget and should be confirm-able by considering the numbers on the staff.
·
Other
expenses should perhaps have risen by 5 per cent but they should be reviewed
after disaggregation.
Other
expenses should perhaps have risen by 5 per cent but they should be reviewed
after disaggregation.
Conclusion:
·
Stock and
creditors are in line with expectations.
Stock and
creditors are in line with expectations.
·
Globally
other overheads are out of line and disaggregation is required.
Globally
other overheads are out of line and disaggregation is required.
·
Sales are
lower than expected. Causes may be misappropriation of stock or cash or a
reduction in selling price which might explain the reduced gross profit also.
Close investigation is required.
Sales are
lower than expected. Causes may be misappropriation of stock or cash or a
reduction in selling price which might explain the reduced gross profit also.
Close investigation is required.
·
Gross
profit is a way out of line. This does not appear to be cut-off errors as stock
and creditors seem to be about right. Debtors are negligible in this type of
retail business.
Gross
profit is a way out of line. This does not appear to be cut-off errors as stock
and creditors seem to be about right. Debtors are negligible in this type of
retail business.
·
If
customers pay by cash, cheque or credit card it might be that misappropriation
of stock or cash has occurred. Further investigation is required. It may be of
course that the management have other explanations – burglary losses, excessive
shoplifting, price competition, sales of old stock at low prices etc.
If
customers pay by cash, cheque or credit card it might be that misappropriation
of stock or cash has occurred. Further investigation is required. It may be of
course that the management have other explanations – burglary losses, excessive
shoplifting, price competition, sales of old stock at low prices etc.
