Question

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?

Answer 1