In: Accounting
North West Paper Inc. (North West) provides cardboard, paper,
and plastic packaging materials to a large number of manufacturers
and distributors in all states. The cardboard and paper division is
a well-established business, but North West has been providing
plastic products only since its takeover of Plastic Products Inc.
18 months ago. The takeover doubled North West’s revenue and caused
changes in its management structure, adding another two divisional
managers. These new divisional managers are in charge of plastic
product sales to different areas of the country, Plastic (Eastern)
and Plastic (Western), and they join the Paper (Eastern) and Paper
(Western) division managers in reporting directly to the CEO.
All internal operating reports are now structured along the four
divisional reporting lines, although external financial statements
continue to be produced for the whole business. All purchasing and
billing systems are fully integrated, although it is possible to
extract data along divisional lines, and by state (as before).
North West purchases bulk supplies of raw plastic and paper and
makes boxes, rolls, and sheets of these materials to fill customer
orders. Production processes in the paper divisions have not
changed, and North West has made minimal changes to the production
processes used by Plastic Products Inc.
-Identify the inherent risks at the financial statement level
caused by the takeover of Plastic Products Inc. What procedures
could the auditors take to respond to risk at the financial
statement level?
-Discuss the factors that would increase or decrease the
reliability of data used in substantive analytical procedures at
North West.