In: Accounting
B. Haziq a senior auditor in charge is called upon to audit client, Momo Motors, which manufactures and supplies automobile parts all over the country. During the financial year 30 June 2019, the company had expanded its operations by opening new sites in a few strategic locations across the country. Mid-January the management appointed an experienced chartered certified accountant to set up an internal audit department. However, by April 2019, the company reported a negative cash flow for the year with sales going down in one of its sites due to the fierce competition in the automobile industry and with the slow economic development in the country. An extensive range of spare parts is held, for which perpetual inventory records are kept, but no continuous checking is conducted by the storekeeper. Meanwhile car servicing and body repairs are carried out in workshops by employed and sub-contracted service engineers where most jobs are stated and finished in a day, but the invoice are immediately prepared upon completion. In last financial year end the company had also faced a change in the management with the resignation of the company’s CEO Mr. Hans Matsu.
Required:
i. Using the information provided, identify, and explain the audit
risk to be addressed when planning the final audit of Momo Motors
for the year ended 30 June 2019
The audit risk to be addressed when planning the final audit of Momo Motors for the year ended 30 June 2019 are:
1. Poor inventory recording:
The storekeeper does not record inventory based on perpetual inventory system which necessitates that the stock ought to be recorded at the cost when a thing is acquired. This can bring about overvaluation of stock as the stock would not have been recorded at lower of cost or net realizable value. From the data given the stock comprises of huge amount of spare parts that are no longer in good demand that are no longer in great interest because of poor monetary turn of events and high rivalry, stock is certainly a material thing.
2. Poor invoicing system
As the data says that the sales are dropping. This could be an aftereffect of inappropriate invoicing of services carried out by employees and engineers. There is additionally a danger that the staff is engaged with stealing the deals by providing services against money and not creating invoices at all. Sales can be lower than expected or reported at a mistaken sum. Incomes are material to the organization so it represents a high danger toward the audit of sales figure.
3. CEO resigned last financial year
The nonappearance of organization CEO makes controls set up more helpless and consequently increment odds of misrepresentation inside the organization.
4. First year of audit
The financial statements are not appropriately arranged and there is no data about these financial statements being audited previously, so this makes it organization's and association's first year of audit that is another tremendous audit risk factor.