Lakeside Case 3, DQ 3

Here are a few areas you may have identified – remember, there may be others that you have identified also, the list is not meant to be exhaustive, merely indicative of key areas of concern. Remember, build on what you have been learning … be aware that you are simply refining, or narrowing down what specific areas of risk that are likely to have already been identified from earlier questions need to be focused on. Ideally you can see how some of these are examples of the items in the checklists (Appendices) to ASAs such as 315, 240 and 570.A3 … if the elements are in ALL of those, so you ought to be relatively more concerned! You can annotate the points you have chosen with the specific references or use the ones below for practice at annotating with the relevant references so you practice finding things in the standards – see previous activity for guidance on how to do this.

• Inventory of high technology items – consumer electronic equipment. This can be easily damaged, and any damage may not be readily obvious. Obsolescence of inventory may be an issue due to rapid technological change.
• The generous returns policy (up to 20% of purchases for up to 4 months after the sale) for the distribution sales made by Lakeside to other retail stores. This will require an estimation of sales returns that are likely to be received by Lakeside after year-end.
• Credit sales across two states for the distribution side of the business. The estimation of uncollectible accounts will require attention. This is another e.g. of the significance of ASA 540 to an audit.
• Rental of most of its stores used for retail sales. Important to ensure that the rental agreements are expenses and not leases that should be capitalised.
• Lakeside has a high level of debt. This needs to be properly reported and disclosed (for e.g., and liens or encumbrances on the debt must be disclosed). The associated interest expense must be correctly calculated and recognised in accordance with applicable accounting standards (you might like to see which one would be most applicable?). You would need to ensure that any loan covenants (conditions) are being complied with.
• Lakeside is considering going public. A company attempting to raise significant capital may be tempted to overestimate assets and revenues. You need to be particularly careful on accounts that lend themselves to significant estimate.