Practice Question:

(8 marks) Sharon Ma is the audit manager for Fleece Industries (FI), a major manufacturer of bedding

and linens. Much of FI's manufacturing is now done overseas. FI uses standard costing for its inventory.

While Sharon is new to the audit, her firm, Pannell Ross (PR) has audited FI for the past twelve years.

The current engagement partner, Jim Kerr, used to be the audit manager before his promotion and is very

familiar with FI. In fact, he regularly plays golf with FI's Chief Financial Officer, Ben Yu.

In the past, FI successfully hedged its currency such that there were only minor differences between

standard cost and actual cost. The small difference was written off as a gain or loss on foreign exchange.

This year hedging was less successful and there is a major understatement of inventory. Ben said since FI

had had a good year anyway, and since the net effect was to overstate cost of goods sold, he'd prefer to

just leave the inventory as is. Restating inventory would be too much work.

FI is listed on Major Stock Exchange (MSX) and uses IFRS for its statements. As Sharon, make your

recommendations to the engagement partner as to which opinion to give.