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
Replies (3)
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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.
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.