Simpson Ltd. manufactures printed circuit boards for use in electrical equipment and has a December 31, Year 1, year end.

Simpson has a storeroom in which all raw materials and finished goods are held. Movements of raw materials and finished goods into and out of the storeroom are recorded. These records are used as the basis for authorizing purchase and sale transactions. Inventory is included in the financial statements based on a year-end inventory count. The inventory terms for purchased goods are FOB destination, meaning ownership transfers once Simpson receives the goods, not when goods are shipped. Simpson sells its goods under FOB shipping point terms, which means that ownership transfers to the customer once Simpson ships the goods. 

Margins are very tight, and the company is struggling to remain profitable. In view of this situation, the audit manager has asked the audit senior to pay particular attention to cutoff at year end. 

Required: 

a) Explain what is meant by the term cutoff, including the typical risk associated with the cutoff assertion. 

b) Discuss the cutoff risk relating to Simpson's inventory and sales and how the auditor might address these risks. 

c) Design five audit procedures the audit senior should perform in relation to accounts payable — cutoff during the audit of Simpson. 

Answer rating: 100% (QA)

a Cutoff refers to the accuracy of the recording of transactions in the correct period It means ensuring that all transactions have been recorded in t... View the full answer