Forming an audit opinion

Forming an audit opinion

You are an audit senior. You are nearing the end of the audit of Nesta Co for the year ended 30 June 20X8.Nesta Co owns a small chain of high-street clothing stores and also has a manufacturing division where it makes it own label brand ‘Little Miss’. Own label clothing represents 50% of the inventory and sales of Nesta Co. The financial statements show a profit before tax of $7 million (20X7: $3 million) and a statement of financial position total of $23 million (20X7: $15 million). The following points have arisen on the audit:

(1) Nesta Co owns a number of its retail premises, which it revalues annually. This year several of its
shops rose sharply in value due to inflated property prices in their locality. Nesta also capitalises
refits of its shops. Two shops were refitted in the year. The total increase in assets due to refits and
revaluations is $10 million. Nesta does not revalue its factory premises, which are held in the
statement of financial position at $175,000.

(2) Nesta values its inventory at the lower of cost or net realisable value. Cost is determined by
deducting a suitable estimated profit margin from selling price. Inventory in the statement of
financial position at 30 June 20X8 was $1,265,000.

(3) Nesta Co has a refunds policy which states that a customer who is not satisfied with their purchase may return their goods within 28 days of purchase and obtain an exchange or a cash refund.Experience has shown that exchanges and refunds are common, as Nesta Co’s shops do not
provide fitting rooms, space being at a premium. Nesta does not make any provision in the
financial statements for refunds.

Required
Comment on the matters you will consider in relation to the implications of the above points on the audit report of Nesta Co.

 

 

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