Noda plc (‘Noda’) is a large company which your firm has just accepted as a new client. You are the audit manager for Noda and are planning the audit for the year ended 31 December 20XY. The principal activity of the company is the manufacture and sale of mobile phones and associated software. Noda is based in the UK but manufactures the phones in China and sells its product all over the world. You are conducting initial planning and risk assessment work and have discovered the following information:

i. Draft Figures for the Year Ended 31 December 20XY Management accounts indicate that the revenue for the year has fallen by 25% compared with the previous year following concerns that Noda is using an operating system for its phones that is unpopular with customers. Noda has entered into a contract with the operating system supplier that lasts for another two years. Withdrawal from the contract could mean that Noda would have to make significant penalty payments to the operating system supplier.

ii. Shareholder Threat As a result of the above the value of the Noda’s shares has fallen significantly. A group of shareholders are protesting that none of the directors should receive bonuses for the year. This issue is receiving a lot of publicity nationally.

iii. Finance Issues Noda has obtained a significant amount of debt finance from various sources and its gearing ratio is now 80%. Industry analysts have commented that Noda may need Pto raise more money from shareholders in the future in order to continue in operations.

Requirements:

(a) Explain why it is important for you to develop a plan to conduct the audit of Noda.

(b) One of the audit juniors asks you about materiality, saying: ‘We’re here to check everything is right, so why don’t we try to find every single mistake?’

(c) Identify and explain the potential audit risks indicated in the scenario above. 

(d) For the fall in revenue described in point (i) above, describe any further analytical review procedures you would carry out to help you judge the severity of the problem. 

(e) Explain how Noda plc could present a business risk to your firm.

Answer rating: 100% (QA)

a It is important to develop an audit plan so that all the material areas are covered under the audit as appropriate in due course of time and obtain ... View the full answer