Auditing and Control in the Organisation

Running Head: AUDITING AND CONTROL IN THE ORGANIZATION 0
Auditing and Control in the Organisation
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AUDITING AND CONTROL IN THE ORGANIZATION 1
Question 1.
1. The write off value for bad debts is understated, a situation that the management is not
willing to rectify. This leads to a material misstatement that mainly affects account
receivables.
Doubtful debts are the account receivables that a business is not sure will be paid by
creditors. Therefore, an allowance is made for them in the books of account (Sigidov,
Korovina, & Trubilin, 2016). This allowance is known as the allowance for doubtful debts
and is entered as a current contra-entry with accounts receivables. If a company sells goods
worth $10000 on credit, it could allow Doubtful debts of $2000. When the business is certain
that a buyer that purchased goods worth say, $950 will not pay, the debt is written off. The
account for account receivables is credited by $950 and the account for allowance for
doubtful debts is debited by $950, affecting only the balance sheet.
An inadequate value of the write off for the allowance for the doubtful debts leads to a
misstatement of the account receivables such that the net realizable value is higher than it
should be. The reason the management is unwilling to adjust the amount is that the
understated value of the write off boosts the value of its assets in the books. Also, it does not
affect the Income statement as the value is already covered under doubtful debts.
2. An inventory is prepared by a retailor who values it by subtracting sales margin from
sales price.
An inventory is a list of goods that are in stock at the end of a trading period. These goods
include finished goods, goods that are a work in progress, raw materials and producer goods.
Inventories are entered into the balance sheet as current assets.

AUDITING AND CONTROL IN THE ORGANIZATION 2
Inventory valuation involves calculating the value of the inventory at the end of a reporting
period. It involves determining the cost of selling goods. This cost involves direct expenses
that are incurred during the conversion of raw materials to finishing goods and the sale of the
goods. These expenses include direct labour, raw materials, transportation and factory
overheads.
The valuation of inventory does not involve administration costs or selling costs (Shogren,
Wehmeyer, & Little, 2017). The retailer, therefore, used a wrong method for valuation of
inventory when she subtracted the allowance for sales margin from the sales price. Sales
margin is got by subtracting the cost of sales from the net revenue generated from sales.
3. The main client of Block company who purchases 45% of their product is facing
liquidation. Block company are finding it difficult to find another customer for their
one product. They are now facing losses.
Liquidation means converting one’s assets into cash money and using the money to pay
creditors. This happens in cases of bankruptcy or dissolution of companies or partnerships
(Cox, 2015). When the customer went into liquidation it means that they are no longer able to
purchase goods or services from The Block Company. And having been responsible for 45%
of the company’s purchases, the customer’s withdrawal is a big blow to the Block company.
The specific nature of the Block company means that the chances of replacing the customer
are very thin. Therefore, the company is going to be making losses equivalent to the 45% that
the customer left with because that amount of goods are not moving.
The Block company has the option of widening the scope of its products because varied
products will attract more clients. This would help in putting the company on its feet again.
Aggressiveness and creativity would be the way forward.

AUDITING AND CONTROL IN THE ORGANIZATION 3
However, in the current situation, The Block Company will not realize enough revenue to
cover its operational costs and this will eventually lead to the collapse of the company since it
will no longer be able to run.
4. Buildings of the Croucher Company that originally cost $12 Million are currently at a
market value of $18.5 Million. The company uses the fair value method to evaluate
the value of the buildings.
The fair value is a method used to measure the estimated market values of assets and
liabilities. The fair value takes into account factors such as cost of acquisition, replacement
costs, risk, cost of return on capital and the perceived utility of the asset by the individuals
involved.
In an efficient market, the fair value and the market value are close or even equal. This is due
to market transparency that allows investors to respond fast and effectively to information
about changes in the market. In a behavioural finance setting, however, there is a disparity
between the fair value and the market value. This results from cognitive bias among both
sellers and buyers of the assets. It takes into account the potential benefits and disadvantages
that the buyer and the seller would enjoy or suffer from the sale of the asset. Sometimes the
price that both the buyer and the seller deem ‘fair’ to both parties could be higher than the
general market price. This generates the term special value which forms part of fair value
assessment.
The buildings at Croucher Company originally cost $12 Million. The value of the buildings
has increased over time due to various reasons such as the changes in the transparent market
price. The market price now places the value of the buildings at $18.5 Million.