Question

Case Study 2 – Auditing ACCT3000 (Semester 2, 2019)
You are an Audit Senior currently planning the 30 June 20X9 audit of Technology Limited, an Australian-owned company that produces and exports computer chips to China. At a recent planning meeting with Technology Limited’s senior staff, you obtained the following overview of this year’s operations:
Tight checks by Australian custom officials have delayed several shipments of computer chips. These delays have angered Chinese customers who are threatening to deduct 20% from the amounts owing as compensation for lost production time.
One of Technology Limited’s customers, Blue Chip Limited, is claiming that the latest batch of computer chips it received was found to be faulty. Blue Chip Limited is refusing to pay its account, which is allegedly seven months overdue. Technology Limited has claimed to have launched an investigation into the allegations, but as yet not been able to substantiate them. Technology Limited has suffered significant cash flow problems because another major customer, Creative Limited (Creative), is experiencing financial difficulties. As a result, Creative is taking well over 120 days to pay outstanding amounts, despite Creative’s terms of trade being payment within 30 days. Creative makes up 40 per cent of Technology Limited’s sales and the board has been reluctant to take any action that might adversely affect those sales. Consequently, Technology Limited has had to increase its dependency on its line of credit, and this has caused it to temporarily breach the debt to equity ratio required in its loan covenant with Big Bank Limited.
One of Technology Limited’s major suppliers went bankrupt one month ago, causing major product shortages. To overcome the problem, Peter James, the husband of the finance director, Natalie James, provided electronic components used in the production of computer chips to Technology Limited through his private company Norton Limited. Norton Limited demands payment in $US prior to the electronic components being supplied. There is no formal agreement in place with Peter James, however, the goods are being provided at competitive prices. You are concerned about the electronic components that Peter James’ company is supplying, because his products are new to the market and you have heard some of Technology Limited’s staff complaining that they are of poor quality.
Due to increased competitive pressure, Technology Limited has recently moved the manufacture of some of its computer chips to Bangladesh. Technology Limited saves around 25 per cent in costs compared to the equivalent Australian made items. However, the manufacturing process takes longer and on a few occasions late delivery from Bangladesh has resulted in lost sales.
Last month, a protester suffered a broken leg, allegedly because he was hit by a company truck. The protester is now suing Technology Limited for damages, claiming the contractor was in fact an employee of Technology Limited at the time of the accident, and was acting on Technology Limited’s instructions. Technology Limited is fighting the case and appears to have a reasonable chance of winning; however, the adverse publicity being generated is making the company nervous about its sales in the future.
During the period, the Australian dollar has remained steady against the Chinese Yuan, although it fell by about 3% against the US dollar. Debtors are invoiced in $US at the time of shipment, and payment is received in $US one month after the shipment is delivered. It takes around six weeks for the charter vessels to travel from Technology Limited’s shipyard at Bigmantle Bay to China. A recent downturn in the Chinese economy is affecting forward orders, which have fallen by 15%.
Required:
Prepare a memorandum to the audit manager, outlining your risk assessment relating to Technology
Limited. When making your risk assessment:
(a) Identify two (2) balance sheet accounts from the information provided that are subjected
to an increase in audit risk. Briefly explain what factors increase the audit risk associated
with the two (2) account balances identified. In your explanation, please mention the key
assertion(s) at risk of material misstatement and the components of the audit risk model
affected for each account balance identified.
(b) Identify how the audit plan will be affected and recommend specific audit procedures to
address the risks associated with each account balance identified.
(Please Note – Maximum Word Limit: 800 Words excluding references)

Answer 1

Design of Audit :

Situation 1- WF upgraded its accounts payable system to a fully integrated package that automatically updates the general ledger when creditor entries are made the errors which happened while recording the transactions have several affected the credibility of accounts payable , some being very severe like interchange of recording currency between USD $ and AUD $ with the creditor balance reset to zero automatically at month starting and amount being manually entered and major accounting staff getting involved in the exercise , a lot f manual intervention has taken price in spite of automation of the process thus increasing the cost of accounting for the organization . So in the audit plan for accounts payable should be designed

The audit plan should be cover checks involving the opening audit year balance of creditors , also sample should be checked for currency entered

The problem underlying the accounts payable system should also be identified and steps should be taken for the same

Scenario -2

No internal audit department is in place in WF Ltd and already there are several accounting losses accruing in the company with expansion to more countries the operations would increase and the accounting would be more complex thus setting up an audit department against accounting and system errors and can be revenue savings for the Organization

Scenario-3

WF does not have a strong system of credit limit checks for the customer in place and it has announced bonuses at an increasing % of the Gross Sales made , by each salesperson , above certain monthly targets . This situation can be extremely risky as sales more than credit limit can be made to customers , thereby increasing the chances of Non Recovery the main account affected by would be a chance that bonuses will be paid against sales to defaulting customer also

Whole designing the audit plan , specific attention shuld be given in this point and credit limit and OSL balances against customers should be checked on sample basis , so that specific steps can be taken to recover the pending amount from the customer