Question

You are the manager in charge of the audit of MtPoint Ltd, a large wholesale company operating out of 10 warehouses located in the major centres country wide. This will be the second year in which you have conducted the audit. The company must be audited and prepares its financial statements internally in terms of IFRS.

During March your senior commenced planning the audit for the current year (financial year-end is 30 June) by updating the audit file working paper on understanding the entity and its environment and has made the following notes:

1. My discussions with A. Deans, the newly appointed financial manager were very worrying. She has recently returned from extended travels around the world and she seemed very nervous. She is definitely not up to date with IFRS. She is unlikely to receive much help from the financial director, because, as noted in last year’s file he is also not up to date, choosing rather to delegate accounting matters to the financial manager.
2. EndPoint Ltd has purchased a 25% share in MtPoint Ltd. This is the company which has recently been in the news for alleged foreign exchange transgressions. EndPoint Ltd also managed to get two directors on the board of MtPoint Ltd as a condition of the company purchasing the 25% shareholder. EndPoint Ltd will be the largest shareholder.
3. MtPoint Ltd’s liquidity position has worsened since prior year financial year-end, and the intention seems to be, according to A. Deans, that EndPoint Ltd will provide loan capital as required.
4. My discussions with J. Baker, the internal audit manager revealed:
   1. His department uncovered an extensive fraud in the purchasing department which has cost the company a great deal of money. Fortunately for us the fraud wasn’t underway when we concluded last year’s audit!
   2. EndPoint Ltd have used their influence on the board to do away with the audit committee as a “cost cutting exercise” and J. Baker is concerned that his department may be next. The department is at present strong and competent.
   3. A new computerised salary and wage system has been implemented.
5. Despite some poor trading results in some regions, MtPoint Ltd has kept its warehouses in all of the ten major centres in operation. Inventory levels remain very high.
6. The credit control function has been decentralised and is carried out by the regional offices. Credit terms are still set by the sales director and financial director and have recently been extended in an attempt to boost sales.
7. The audit deadline will be 21 working days after year-end.

REQUIRED:

Discuss the effect that the information given will have on the overall audit strategy.

Answer 1

Facts of the Case which hindered the Audit Startegy are as follows:

- EndPoint Directors in the Members of Board

- Finance Controller is naive in Financial Reporting , As discussing the major area of risk need to be identified by the Auditor itself.

- Loan by the EndPoint for further Working capital requirement

- Cost cutting exercise

- Unauthorised or Unauthenticated exercise of transaction by EndPoint

- Decentralised of Warehouse and activity carried out by regional offices

- Computerised system for HR recording and payroll

As above facts are observed while understanding the entity and its environment. Auditor has to put every task in very minute manner, as Endpoint is using his influence to control the directorship of the Company.

In order to evaluate the Risk of material misstatement extensive procedures need to be in place and secondly once auditor are satisfied that no other possible way to supress that fraudulent ctivity only then same will be revealed to the audit committee.

- Possible way for external party confirmationss

- Accounts of EndPOint need to be checked thourughly and area where recent changes is made in process by the directors of Endpoint need to be taken care of.

- Transaction where the party is somewere related with the endpoint is properly tracked, recorded or chacked and document authenticity and its originality should also be checked.

Adove are the strategies which red alert the auditors the actions to be taken to detect any un wrongdoings by the Endpoint influencers and lead the ompany to insolvent.