Tag (SQ): Audit Effectiveness

Your firm has been the auditor of Rylan Products, a listed company, for a number of years. The engagement partner has asked you to describe the matters you would consider when planning the audit for the year ended 31 January 20X5.
During a recent visit to the company you obtained the following information:
(i) The management accounts for the 10 months to 30 November 20X8 show revenue of €13 million and a profit before tax of €400,000. Assume revenue and profits accrue evenly throughout the year. In the year ended 31 January 20X5, Rylan Products had revenue of €11 million and a profit before tax of €800,000.
(ii) The company installed a new computerised control system which has operated from 1 June 20X8. As the control system records inventory movements and current inventory quantities, the company is proposing:

• to use the quantities on the computer to value the inventory at the year-end; and
• not to carry out a physical inventory count at the year end.
  (iii) You are aware there have been reliability problems with the company’s products, which have resulted in legal claims being brought against the company by customers, and customers refusing to pay for the products.
  (iv) The revenue increase in the 10 months to 30 November 20X8 over the previous year has been achieved by attracting new customers and by offering extended credit. The new credit arrangements allow customers three months credit before their debt becomes overdue, rather than the one month credit period allowed previously. As a result of this change, the age of receivables has increased from 1.6 to 4.1 months.
  (v) The financial director and purchasing manager were dismissed on 15 August. A replacement purchasing manager has been appointed but it is not expected that a new financial director will be appointed before the year end of 31 January 20X5. The chief accountant will be responsible for preparing the financial statements for audit.

Required

(a)  Describe the reasons why it is important that auditors should plan their audit work.

(b)  Explain why ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements requires auditors to obtain a general understanding of the legal and regulatory framework applicable to their client and how their client is complying with that framework. Set out the action auditors should take if they suspect material areas of non-compliance.

(c)  Describe the matters you will consider in planning the audit and the further action you will take concerning the matters listed in (i) to (v) above.