Question

Assume you are the audit senior of High-tech Limited (HTL) and currently planning the audit for the financial year ended 30 June 2020. You have obtained the following information: • Your firm has audited HTL since its incorporation six years ago. During this entire period, HTL has been given unmodified audit reports. • HTL manufactures high-tech car components and exports these exclusively to Japan. The Japanese market has grown exponentially in the last few years. It has become the company’s most significant customer base, representing 60% of HTL’s revenue. Most of the contracts are payable in $US or local currency. • The ongoing Covid-19 economic crisis and related currency downgrading is having a significant impact on most world economies, including Australia. Required: From the above information provided in relation to HTL: 1. Identify TWO key accounts that are at risk of misstatement due to fraud. 2. For each account identified in (1) above: (a) Provide a brief explanation as to why the account is at risk: (b) List the key assertion where audit efforts should be concentrated; and (c) Describe substantive test of detail you would perform to gather sufficient appropriate audit evidence in relation to the assertion identified in (b) above.

Answer 1

a) The two accounts that are at risk of mistatement due to fraud are sales and inventory.

Sales - Due to global downturn in the midst of Covid pandemic, the organisation sales is affected by two factors

• reduction in volume of sale of high tech car components due to lower demand for cars
• foreign exchange fluctuation risk

On account of the above, their is a possibility of inflation of sales and resultant receivables.

Inventory - Inventory valuation is at the control of the organisation. There is a temptation to recast inventory by changing the method of valuation as it has a direct impact on gross profit, retained earnings and resultant shareholder's funds.

b) Inventory valuation needs to be checked to ensure that adequate provision is made for slow moving, obselete inventory. Valuation methods need to be monitored. Sales and receivables need to be throughly scrutinized. Teaming and lading practices need to be checked for.

c) Substantative tests

1. Tests of detail
2. Analytical procedures

Tests of detail: Tests of detail include verification on transactions, account balances and disclosures.
Analytical Procedures: Analytical procedures consist of evaluations of financial information through analysis of plausible relationships among financial as well as non-financial data. Analytical procedures also encompass investigation of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.

Inventory

• check high value items
• inventory in transit
• physical stock to book
• valuation methods
• reasons for any changes therein
• test error prone items
• reconcile inventory to GL

Sales

• valuation based on forex rates
• sales occurence - base documents
• correlation with inventory movement
• checking discounts
• cut off procedures
• analytical review with cost of sales
• sales mix review