Question

In: Accounting

You have recently been appointed as senior-in-charge of the audit of SignsCo, a subsidiary of BillsCo....

You have recently been appointed as senior-in-charge of the audit of SignsCo, a subsidiary of BillsCo. The company must be externally audited. The company produces a wide selection of signs and signboards, ranging from small signs used on doors to large freestanding road signs. Traffic and road signs form the major portion of the company’s sales. SignsCo only supplies signs; it does not attach or erect them.

Your firm has held the appointment of auditor for some years but you have not worked on the audit before. Early in April your audit manager forwarded a letter to you from the external auditors of BillsCo which indicated that they required the “audit pack”, consisting of the audited financial statements, various schedules and questionnaires for the 30 June 2019 financial year end audit of SignsCo, to be in their offices by 15 July 2019. This development has taken your firm by surprise as in prior years no such instruction has been given. No work on the 2019 audit has taken place.

Your audit manager also attached a note to the letter suggesting that you get started on the engagement immediately by attending the monthly meeting between the financial controller and the internal audit manager of SignsCo, which was scheduled for the next day. You arranged to attend, and despite your lack of knowledge of SignsCo, you were able to take note of the following:

The company’s year-end inventory count has been scheduled for 30 June 2019. Inventory consists of raw materials, WIP (manufacturing is quite complex as various weather coatings on outside signs must be applied and heat treated), finished goods in the form of standards signs, and custom-made signs for specific customers awaiting invoicing and delivery. Inventory is held at all of the company’s four manufacturing facilities.
The company has numerous debtors, and accounts receivable has always been a material amount. The financial controller mentioned that the company was experiencing difficulty in recovering a number of material amounts owed by road authorities. This has arisen out of disputes over road signs which SignsCo has manufactured and invoiced, but which bear the names of towns and streets which have had their names changed during, or subsequent to, the manufacture of the signs. SignCo argued they manufactured the signs “per the order”. The financial controller indicated that the failure to recover the amounts owed has placed serious strain on the cash flow, and could affect future dealings with these customers. SignsCo lawyers are undecided about what the outcome of the court case would be, other than it would be long and drawn out.
As a matter of course, SignsCo’s internal auditors perform ongoing reviews and test of controls on the company’s accounting systems. They also evaluate the company’s risk assessment procedures and its responses thereto.

Having attended the meeting, you decided to commence with planning your audit right away as suggested by your audit manager.

REQUIRED:

Explain why it is so important for the auditor to obtain a thorough “understanding of the entity and

its environment.

Discuss the procedures you will conduct to identify and assess the risk of material misstatement

through understanding SignsCo and its environment.

Discuss, giving reasons, your assessment of the risk of material misstatement in respect of the

30 June 2019 audit of SignsCo, based on the information given in the question.

Expert Solution

Facts of the case: SignsCo. ( Subsidiary Co. of Bills Co.) Bills CO. auditor is different from Signs Co., Which required Audit report of Signs CO. Auditor. Secondly As per the Standards on Auditing where Auditor are different for PArent and its component company a level of communication should be in place bewtween parent auditor and other auditor.

So here also, as requested by Parent auditor to furnish 30 June 2019 Audited financial report by 15 july 2019 in the begining of April 2019.

As a kickoff for the same following issues being observed during the meeting:

- Four manufacturing facilities, Stock of Raw material, WIP and Finished Goods

- Debtor and Accoutn receivable is high in number and conversion rate is very low

why it is so important for the auditor to obtain a thorough “understanding of the entity and its environment.

As here SignsCo Auditor has to report Audited financial report and he is conducting this organisation audit first time, in order to hit the areas which require more consideration and time is also constraint in this case, it is advisable to understand the entity its environment and accordingly plan the Audit activity. Planning the engagement will helps component auditor to focus on area of major concern and where its seems impossible to conduct audit accordingly report over the same. Secondly understanding entity helps to priortise the risk, Risk Assessement can be done accordingly and recommendations for improvement if required.

Discuss the procedures you will conduct to identify and assess the risk of material misstatement through understanding SignsCo and its environment.

Here as per understandability of the entity two material issues taken care of

Inventory Management : Maintaing RAW Material ( Check Pareto Analysis and count that material contributing 80% of the cost of Raw material and Physical inventory verification report to be documented from the part of management also. Added to it check the valuation for the same is correctly made or not.

WIP: WIP Recording based on the large number of order received from which party, Account to be verified from the same.

Finished Goods: Stock for the same is separately maintained, Valuation is as per accouting standard , disclosure for the same and recording is made in the books.

For Receivable Recordings: As stated above, Account receivable trunover is very low and experiencing the blockage of funds. Here the Policy in respect of Account receiveable to be checked, Written off policy, THird PArty confirmation, to be taken care off.

Check the Ageing period of Receivable, Actiosn taken care off by the management for the recovery of the same.

As per Legal Advisor opinion, not able to provide relevant details for the same. It is advisable to provide against the receivable in the books.

Where it is not feasible for component auditor to conduct audit due to time constraint, due to other factor, such facts need to be disclosed.

Assessment of Risk: On Understanability of the Entity and its Entity , the Risk Assessement on audited major areas, inventory recording, receivable recordings etc. the level of risk entails which level herewith. IF the Risk is higher further substantive procedures is required to understandability and assessment of risk as stated above. Further recommendations about the maintenace of books, its true and fair view. Control are in place and effecting properly.

ekkarill92 answered 2 years ago

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