Tag (SQ): Substantive Approach

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.