Reference no: EM132611849

You are the auditor of Nairobi Motor spares ltd, a private company which wholesales parts for cars and vans. You have completed the fieldwork for the year ended 30 April 2019 and have identified the following three outstanding issues.

1. Nakuru Motor Spares Ltd has been a customer of Nairobi Motor Spares Ltd. At 30 April 2018, the previous year-end, the amount due from Nakuru Motor Spares Ltd was Sh 22,400,000 out of total trade debtors of Sh 145,600,000. Nakuru Motor Spares Ltd is slow payer but places frequent orders with Nairobi Motor Spares Ltd. Although the amounts due at 30 April 2019 were settled in the year to 30 April 2019, further supplies have increased the balance on Nakuru Motor Spares ltd's account to Sh 35,840,000 at 30 April 20019. Nairobi Motor Spares ltd informs you that it has recently obtained a floating charge on the stock of Nakuru Motor Spares ltd and the client therefore believes no provision is required at 30 April 2019.

2. On comparison of the physical count with computerized book stock records at 30 April, many individual unders and overs have been identified, some of which are large in terms of quantities and values. The client has explained, that because there are several thousand limes and many parts are similar in description and size, mistakes easily occur and the unders and overs are, therefore, the result of errors in description or categorization. Accordingly, the client is satisfied that this is not a matter of concern and proposes to make adjustment to the book stock figure.

3. Stock has risen substantially over the 12 months to 30 April 2019 and the client is unable to provide a satisfactory overall explanation. An analysis of the increase would require an extensive line-by-line review, which the client is unwilling to do because of the number of lines in stock. The managing director suggests that bulk-buying opportunities offered at attractive prices account for a good part of the stock increase. The client's computer system generates a document called an "old stock listing" which the audit staff has used to assess stock provisions. It is produced annually at the year-end by a special software routine. The old stock listing identifies only those stock lines not moving at all during the last six months of the year and shows a 25% increase on the previous year in the total value of such items. No further ageing information is produced. The client has based the stock provision on items included in the "old stock listing".

Required:

Question 1: In respect of each of the above three issues, state what further evidence you would seek in order to reach a conclusion upon the accounting treatment to be adopted in the financial statements of Nairobi Motor Spares ltd at 30 April 2019.