You are the manager responsible for prospective new clients and you have visited Bolington Publishing plc which
Question:
You are the manager responsible for prospective new clients and you have visited Bolington Publishing plc which publishes a small range of fiction paperbacks. The chief executive is Daniel Dunbar, and he has asked your firm to make a proposal for the company's audit and other services. During the initial meeting you have ascertained the following:
• The company's turnover has increased by about 20 per cent a year for the last three years.
• Daniel is a dominating personality who is very ambitious.
• The company has recently paid very large sums to two relatively unknown authors for new books which Daniel thinks will be highly successful.
• Bolington has borrowed heavily from its bank and a major repayment of the loan is due shortly. The company is already on its overdraft limit as a result of the advances to the new authors. Daniel is in negotiation with a foreign bank for further finance.
• Many of the company's books are printed in a country with an exchange rate which is very favourable to the UK. The financial press has lately suggested that this rate may change in the near future.
• The company recently purchased a very large and very complex computer system to control all its affairs.
The IT manager has just left and gone to Australia.
• The company has agreed to sponsor a sailor who is racing around the world single-handedly and the cost of this is not yet clear. The company has a racing yacht which Daniel sails.
• The company has received a writ from a person who alleges they have been wronged by a book published by the company. The company has large stocks of this book and is contesting the issue.
• The company has no formal management accounting system but the new IT system, when it is working, will supply this.
• Daniel wishes to maintain the company's high share price so that he can use the shares to take over a competitor.
• The company recently took over an ailing printing firm. Daniel reckons he can turn it round.
Discussion
- Identify and describe the principal business risks relating to Bolington.
- Justify an appropriate audit strategy for the first audit of Bolington.
- Suggest some procedures that Bolington could implement immediately to manage the risks.
- What effect might these risks have on the financial statements?
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