- 10 Marks
Question
Your firm has been appointed as Auditor for Akanji Ltd for the year ended 31 December 2022. Akanji Ltd designs, manufactures, and retails traditional fabrics. In trying to understand Akanji Ltd’s business, you observed the following:
- Inventory is held at the warehouse and at retail shops in three different locations.
- Customers place orders online and review the designs before sales are made.
- There was a sharp fall in revenue due to the influx of “pirated fabric” and the directors are uncertain whether this trend will stop.
- One retail shop was closed during the year and the premises are still available for sale.
- The Internal Auditor was dismissed in the course of the year and is pursuing a claim for unfair dismissal. The Finance Director currently doubles as the Internal Auditor.
- The Managing Director is due to retire next year and is likely to request repayment of loans he advanced to the business. Negotiations with the bank in respect of a loan to repay the Managing Director have started.
Required:
Identify and explain FIVE (5) risks arising from the above that should be considered when planning the audit of Akanji Ltd.
(10 marks)
Answer
- Inventory Movement: Due to the portable nature of inventory and its movement between multiple locations, controls must be strong to prevent theft, and revenue recognition issues may arise when customers hold inventory on approval.
- Specialized Inventory Valuation: Individual material inventory may need careful valuation and evidence from independent experts to verify authenticity, especially with specialized items like traditional fabrics.
- Going Concern Risk: The entity’s declining sales, closure of one shop, and the Managing Director’s retirement raise concerns about the ability to continue as a going concern.
- Internal Control Weakness: Dismissal of the Internal Auditor and consolidation of the role with the Finance Director indicate weakened internal controls.
- Provision for Legal Liability: The potential claim for unfair dismissal from the Internal Auditor might require a provision in the financial statements.
- Tags: Audit Planning, Audit risks, Business Planning, Corporate Governance, Internal Controls
- Level: Level 2
- Uploader: Dotse