You are performing the audit of the XX Limited (CXX) financial statements for its year ended September 30, 20X0.
CXX is a private company and operates a grocery distribution business in the Greater Toronto Area. CXX’s audited financial statements are used mainly by its bank, which has made a large operating loan to CXX.
The bank requires CXX to maintain a quick ratio of at least 1.2, based on its year-end financial statements; otherwise, the bank can require CXX to repay the loan in full immediately.
CXX’s accounting policy is to value its inventory based on the FIFO cost flow assumption. On September 30, 20X0, CXX had received a large truckload of pomegranate juice from California Fruit Inc. Since these goods were in CXX’s warehouse at year-end, they were included in the year-end physical inventory count. During your audit you have discovered that the company’s accountant did not record this purchase in the accounts payable balance until October 10, 20X0, when an invoice was received from the supplier, California Fruit, in the amount of $65,000.
Before correcting this error, CXX’s draft financial statements show inventory of $900,000, total current assets of $1,500,000, accounts payable of $250,000, and total current liabilities of $450,000.

a. Explain how the accounts in the CXX September 30, 20X0, financial statements will be affected by this error. In your explanation identify the assertion(s) violated by this error.
b. Give one example of an audit procedure that would have discovered this error. Explain clearly how this procedure could discover the error.
c. What is the impact of this error on CXX’s quick ratio? Show calculations.
d. Would you consider this error to be material? Justify your response.

  • CreatedJanuary 09, 2015
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