Question

Berjaya Gemilang Company (BGC) operates a road maintenance company. Consider the following information;

Your firm has just been appointed auditor of BGC at its annual general meeting. During your planning of the audit, you notice that BGC is an unlisted public company and its director do not consider it to be reporting entity. BGC has prepared special-purpose financial report for the past 5 years. It has significant bank debts and is required to lodge audited accounts with its banker within 90 days of year end.
BGC recently won a substantial contract to perform road maintenance work for Malaysia government for the next 3 years. As a result of winning the contract, to meet the increased demands and satisfy the specialized nature of the work for the government, BGC purchased additional machinery. The machinery has an expected life of 10 years.
BGC is also involved in the manufacture of backyard water tanks. A revolutionary process developed a couple of years ago has enabled BGC to build a tank far superior to any of its competitors, at half of the price. It has therefore denominated the market over the past few years. However, you recently read a weekend newspaper in which you saw an article previewing BGC’s main competitors’ new tank. It is mad of a new material called Xenarafom, and it will be superior to BGC’s tank and cost 30% less.

Briefly explain why each of the three situations above represent a risk. (6 markah / marks) and Identify the main account or group of accounts affected by these risks and how the risks would be affected the audit plan. (9 markah / marks)

Answer 1

Situation	Explanation for risk	Accounts affected	Affect on audit plan
Special purpose financials and audit accounts requirement	1. Non-Compliance of GAAP as private entitity to prepare financials 2. Unnecessary pressure to complete audit on time 3. Significant debt could lead to going concern issues	Financial statement as a whole	Plan to Obtain detailed going concern assessment memo and review it
Road maintenance work and special machinery purchases	1. Adequacy of depreciation due to specialise nature of machine and life of machine	1. Depreciation expenses 2. Fixed assets	1. Plan to obtain evidence for useful life assessment 2. Plan to obtain evidence of future use since machinery is specialised nature
Challenge to market share	1. Going concern issues 2. Pressure to meet cashflow could lead to fraud	Overall financial statement	1. Plan to Obtain evidence for fraud risk 2. Plan to Obtain detailed going concern assessment memo and review it