EC7112 Financial Accounting and Audit

Questions
Lafferty Ltd manufactures and sells clothing and their inexperienced bookkeeper
has produced the following trial balance for the 9 months ended 31st March
2020. The company has decided to move the financial year end away from June
as that is a very busy time for them.
You are required to:
(a) Prepare journal entries to deal with all necessary adjustments, clearly showing that
the errors have been corrected and the suspense account cleared. (30 Marks)
(b) Prepare a statement of profit or loss, a statement of changes in equity and a
statement of financial position for the period to 31st March 2020 in a format that
would be fit for publication. (40 Marks)
(c) Using the financial statements that you have prepared in (b) above and the data
given below relating to the year ended on 30th June 2019 you are required to identify
the important issues that would need to be given attention by the company’s auditors
and suggest some relevant audit tests that would need to be carried out.
(30 Marks)

Additional information:
1. The land and buildings are shown at cost including £5,000,000 for the land. Buildings
are depreciated on a straight-line basis over 60 years
2. Shop fittings are depreciated at 25% per year on a reducing balance basis
3. Machinery is depreciated on a reducing balance basis at 20% per year
4. There have been no additions of property, plant or equipment in the period. Lafferty
Ltd charges a full years depreciation in the year of purchase and none in the year of
disposal.
5. A dividend of 5p per share was declared on 28th February 2020 but has not yet been
paid and a further dividend of 10p per share is expected to be declared in April.
6. Insurance includes £36,000 for the year to December 2020
7. An accrual for heat and light for March 2020 is needed. Two thirds of heat and light is
for administration and the rest is for production.
8. A credit note from a supplier for £24,000 has been debited to payables and debited
to returns inwards
9. A bill for insurance for £24,000 has been credited to the bank account and debited to
office expenses
10.The 25 year bank loan was taken out 5 years ago and the capital is being repaid in
equal annual installments on 31 March each year.
11. Inventory at 31 March 2020 is valued at a cost of £940,000 for raw materials and
£760,000 for work in progress. There was a serious fire in the finished goods
warehouse on 31 March 2020 that destroyed the finished goods inventory and all
records relating to it. Lafferty Ltd claim to operate to a strict policy of making a 40%
gross profit mark-up. The destroyed goods are covered by an insurance policy that
covers the cost of the goods destroyed.
12.A debt of £63,000 is irrecoverable and further debts of £180,000 are 60 days or more
overdue.
13.Lafferty Ltd sold some shop fittings on 31 March 2020 for £40,000 in cash. The
bookkeeper has not recorded the transaction. The fittings cost £150,000 5 years
ago.
14.60% of the wages relate to production labour.
15.Corporation tax for the period is estimated at £22,000
16.Relevant data from the financial statements to 30 June 2019:
 Revenue £12,980,000
 Gross profit £4,327,000
 Profit for the year £1,075,000
 Trade Receivables £1,082,000
 Trade Payables £450,000