Accounting Case Essay

620 WordsApr 10, 20153 Pages
Rosella is the senior in charge of the current-year audit of Harrier Limited, a company that designs and manufactures highly sophisticated machines used to make precision plastic parts and instruments. The machines have a high dollar value (ranging from $500,000 to over $1,000,000) and there is a long lead time between receiving a customer’s order and specifications, designing the machine, building it, and testing it. Because of these business factors, sales do not tend to follow a regular pattern, but certain constraints exist that can be used to analyze the reasonability of sales for audit purposes. Customer orders are tracked as the “back-log” file, and sales can be expected to follow the backlog after allowing for design, manufacturing, and testing time. This takes between two and three months, on average. Another factor is the physical limitation of the factory and equipment: There are 12 job stations where machines can be built, so a maximum of 12 machines can be in the work-in-process inventory at any one time. Harrier’s shares are privately held by its founder and president, and several outside investors, but it issued bonds to the public several years ago and is subject to debt covenants that require it to maintain a working capital ratio of 1.5 to 1.0 and a debt to equity ratio of 0.5 to 1.0 at each year-end. In addition, no dividends or management bonuses can be paid out unless the net income before taxes is at least $1,000,000. The draft statements for the current year meet all covenants and show a net income before taxes of $1,300,000. In reviewing the monthly sales for the current year, Rosella notices several anomalies. First, 15 machines were shipped in December, the last month of the current year, while in December of the prior year only six were shipped. The average monthly shipment volume is between five and six machines. Also, the average gross

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