Reporting internal sales and purchases

Reporting internal sales and purchases

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A client we act for has internal sales and purchases totaling approx £300,000 each. The company has turnover and purchases of £6.7m and £6.2m respectively (including the internals).

Due to the difficulty in reconciling the internals, the internal sales and purchases have always been maintained in the accounts.

Obviously there is no effect on gross profit, but both turnover and purchases are both overstated (towards 5%).

Would one consider that that turnover and purchases are materially mis-stated and thus consideration is required for the impact on the audit report?

Or, would it be enough to amend the turnover policy to include internally generated sales and purchases?

Or, am I getting over excited as this has no impact on the published abbreviateds?

Many thanks for any comments.

MP

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By AnonymousUser
15th Sep 2006 13:34

Food for thought
With a turnover figure of £6.7m, I think you should also consider whether filing abbreviateds is appropriate as this figure is above the small company threshold and the balance sheet total and employee count should be examined.

Failure to comply with UK GAAP should mean a qualification of the audit report, except for instances where the true and fair override can be used (when standards contradict the Companies Act, as in the case of investment properites). However, the use of the override does not appear to be appropriate here.

Would anybody like to comment on whether an 'Except for' could be used in qualification? As stated, the inclusion of internal sales and purchases does not affect the gross profit, nor should I imagine it affects the balance sheet, so a user of the accounts may still be able to draw the correct conclusions. Adequate disclosures would still need to be made within the notes to the accounts themselves.

If the audit report in the full accounts is qualified then I think that the audit report in the abbreviateds will need reference to this fact.

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By User deleted
15th Sep 2006 12:42

Adjust or qualify
I think your problem is that even if you adjust the accounting policy note the accounts will still not comply will UK GAAP.

The answer is to adjust the sales and purchases to eliminate the internal transactions. You say it is a problem to reconcile them. I assume this is because the issue was not considered when the client set up their nominal coding structure rather than a books and records issue. So you may have to use your best estimate for the adjustment.

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David Winch
By David Winch
15th Sep 2006 16:01

Abbreviated accounts

When considering capability to file abbreviated accounts do ensure that you are using the correct "Balance Sheet total".

This is defined as fixed assets plus current assets (so there is no deduction for liabilities).

In most Balance Sheets the total figure is actually after deduction of liabilities (and so is not the correct figure to use when deciding if abbreviated accounts are permitted).

Turning to the question - if you were to deduct a round figure from turnover and purchases, which you have some basis for concluding is roughly correct, say £300,000 then there would be no need to qualify the audit opinion, would there?

David

P.S. My favourite lecturer when I was an undergraduate was a chap who used to say, "Accountants have a passion for producing figures which are precisely wrong - rather than roughly correct." Mind you, that was in the days when accounting for inflation was the hot topic.

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