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One of the disadvantages with a business risk approach to the audit is:
A A perceived conflict with auditor independence
B Increase in knowledge of the client’s business
C A reduced focus on processing errors
D More senior staff are involved
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You are the audit manager responsible for visiting potential new audit clients. You are visiting an electrical wholesaler, Sparks Electrical Wholesalers (Sparks), a limited liability company. The managing director and majority shareholder, Mr Samuel, has asked your company to tender for the audit because he is considering obtaining a quotation on the Accra Stock Exchange.
You make the following notes from your initial meeting:
Revenue has grown from $2 million to $3.5 million in the last two years and the company is very profitable. Finance is needed, in order to:
(1) establish a nationwide customer base by making some of the company’s products available to the public through builders merchants; and
(2) set up a subsidiary in Vietnam to purchase supplies. No sales would be made there as the company faces strong competition.
Mr Samuel is the main contact with suppliers and customers and negotiates prices directly with both. Mr Samuel is in charge of buying, sales and stores. A senior bookkeeper has recently been recruited (not a qualified accountant) to help with credit control and to set up more formal accounting systems and procedures. There is a recently installed accounting software package but staff are still being trained to use it and Mr Samuel’s former brother-in-law has specifically written the software. Mr Samuel is dissatisfied with his existing firm of accountants who prepare and audit the annual financial statements. His dissatisfaction is partly because of the un-reconciled amounts on the ledgers and partly because his accountants have failed to suggest how he can take increased emoluments to meet his personal needs.
Required:
(a) Write a memorandum to the intended audit partner which highlights the principal business risks for Sparks Electrical Wholesalers identified from an analysis of the above information. (b) Write a memorandum to the intended audit partner which highlights the factors that should influence the partner in deciding whether or not the firm should make a proposal for this engagement. (c) Write a memorandum to the intended audit partner which highlights the principal risks you would identify if planning the first audit of Sparks Electrical Wholesalers. (d) Write a memorandum to the intended audit partner which highlights two significant steps which could be taken by the company to improve accounting procedures and financial controls prior to the next audit.
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(a) Outline the circumstances when it is appropriate to use only a substantive approach in an audit and when a combination of a systems-based approach and substantive procedures should be used. (b) Explain what is meant by the business risk approach to an audit and describe advantages and limitations of this approach.
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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:
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.
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You are the audit manager in charge of the audit of Seaford Supplies Ltd., a limited liability company. The company’s year-end is 31 December, and Seaford Supplies Ltd. has been a client for seven years. The company purchases and resells fittings for ships including anchors, compasses, rudders, sails, etc. Clients vary in size from small businesses making yachts to large companies maintaining large luxury cruise ships. No manufacturing takes place in Seaford Supplies Ltd.
It is now early in 20X8. Information on the company’s financial performance is available as follows:
| 20X8 Forecast | 20X7 Actual | |
|---|---|---|
| ₵’000 | ₵’000 | |
| Revenue | 45,928 | 40,825 |
| Cost of sales | (37,998) | (31,874) |
| 7,930 | 8,951 | |
| Gross profit | ||
| Administration costs | (4,994) | (4,758) |
| Distribution costs | (2,500) | (2,500) |
| Net profit | 436 | 1,693 |
| 20X8 Forecast | 20X7 Actual | |
| ₵’000 | ₵’000 | |
| Non-current assets (at net book value) | 3,600 | 4,500 |
| Current assets | ||
| Inventory | 200 | 1,278 |
| Receivables | 6,000 | 4,052 |
| Cash and bank | 500 | 1,590 |
| 10,300 | 11,420 | |
| Total assets | ||
| Capital and reserves | ||
| Share capital | 1,000 | 1,000 |
| Accumulated profits | 5,300 | 5,764 |
| Total shareholders’ funds | 6,300 | 6,764 |
| Non-current liabilities | 1,000 | 2,058 |
| Current liabilities | 3,000 | 2,598 |
| 10,300 | 11,420 |
Other information
The industry that Seaford Supplies Ltd. operates in has seen moderate growth of 7% over the last year.
Non-current assets mainly relate to company premises for storing inventory. Ten delivery vehicles are owned with a net book value of ₵300,000.
One of the directors purchased a yacht during the year.
Inventory is stored in ten different locations across the country, with your firm again having offices close to seven of those locations.
A computerised inventory control system was introduced in August.
Inventory balances are now obtainable directly from the computer system. The client does not intend to count inventory at the year-end but to rely instead on the computerised inventory control system.
(a) According to ISA 300, the auditor should plan the audit work so that the engagement will be performed in an effective manner.
Required:
Explain why it is important to plan an audit
(b) Using the information provided above, prepare the audit strategy for Seaford Supplies Ltd. for the year ending 31 December 20X8.
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