You are an audit Supervisor of Pictaoror & Co and are planning the audit of Hulindos...
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You are an audit Supervisor of Pictaoror & Co and are planning the audit of Hulindos Ltd for the year ending 31st March, 2022. The company is a food retailer with a large network of stores across the country and four warehouses. The company has been a client of your firm for several years and the forecast profit before tax is K60.5m. The audit manager attended the entry conference with the finance director and provided you with the following notes of the meeting. Entry Conference Notes: Lindos Ltd has an internal audit (IA) department whose responsibilities, among others, include the undertaking control testing across the branches of stores. Each store is visited at least once every 12 months. The audit manager has discussed with the chief accountant that the internal audit team may place reliance on the controls testing which is carried out. During the meeting, the Chief Accountant (CA) provided some forecast financial information. Revenue for the year is expected to increase by 3% as compared to 2022; the gross margin is expected to increase from 70% to 90%; and the operating margin is predicted to decrease from 50% to 60%. This is due to the fact that the COVID 19 has been under some level of control and that the war in Ukraine was going to end with a negotiated agreement by all the parties. Lindos Ltd values inventory in line with industry practice, which is to use selling price less average profit margin, however the company directors think that this technique to be a close approximation to cost. Further, it was noted that the company does not undertake a full year-end inventory count and instead undertakes monthly perpetual inventory counts, each of which covers one-twelfth(1/12) of all lines in stores and the warehouses. As part of the interim audit which was completed in January, an audit junior attended a perpetual inventory count at one of the warehouses. It was noted that that there were a large number of exceptions due to negative variances. When discussing these exceptions with the financial controller, the audit junior was informed that this had been a recurring issue. During the year, IA performed a review of the non-current assets physically present in around one-third of the company's stores. It was noted further that a significant number of assets which had not been fully depreciated were identified as obsolete by this review. 1 The company launched a significant internet campaign in January 2022 in order to increase revenue. The Company Directors reported that at the year-end. A current asset of KO.9M was to be recognised understanding that the advertisement were going to boost the sales. Due to actual and perceived misapplication of funds as a result of payment to ghost workers, Hulindos Ltd decided to outsource its payroll function to an external service organisation, which was tasked to perform all elements of the payroll cycle and sends monthly reports to the company with details of salaries and wages including the statutory obligations. In Mid- 2023, the company is planning to expand its operations by opening three new stores and in order to finance this, in October, 2022, the company obtained K20m bank Loan payable in arrears over five years in quarterly instalments. In the preparation for this expansion, the company is looking to streamline operations in the warehouses and is planning to declare redundant 200 employees after the year end. However, no decision has yet been made as to when this will be announced, but it is likely to be made at the end of 2023. The redundant employees were going to be paid all their outstanding dues with cheques attached to their letters of separation in line with the directives given by the Board of Directors. Required: (a). Describe EIGHT audit risks and explain the auditor's response to each risk in planning the audit of Hulindos Ltd (16 marks) (b). Define and explain what is meant by materiality and performance Audit (9 marks) You are an audit Supervisor of Pictaoror & Co and are planning the audit of Hulindos Ltd for the year ending 31st March, 2022. The company is a food retailer with a large network of stores across the country and four warehouses. The company has been a client of your firm for several years and the forecast profit before tax is K60.5m. The audit manager attended the entry conference with the finance director and provided you with the following notes of the meeting. Entry Conference Notes: Lindos Ltd has an internal audit (IA) department whose responsibilities, among others, include the undertaking control testing across the branches of stores. Each store is visited at least once every 12 months. The audit manager has discussed with the chief accountant that the internal audit team may place reliance on the controls testing which is carried out. During the meeting, the Chief Accountant (CA) provided some forecast financial information. Revenue for the year is expected to increase by 3% as compared to 2022; the gross margin is expected to increase from 70% to 90%; and the operating margin is predicted to decrease from 50% to 60%. This is due to the fact that the COVID 19 has been under some level of control and that the war in Ukraine was going to end with a negotiated agreement by all the parties. Lindos Ltd values inventory in line with industry practice, which is to use selling price less average profit margin, however the company directors think that this technique to be a close approximation to cost. Further, it was noted that the company does not undertake a full year-end inventory count and instead undertakes monthly perpetual inventory counts, each of which covers one-twelfth(1/12) of all lines in stores and the warehouses. As part of the interim audit which was completed in January, an audit junior attended a perpetual inventory count at one of the warehouses. It was noted that that there were a large number of exceptions due to negative variances. When discussing these exceptions with the financial controller, the audit junior was informed that this had been a recurring issue. During the year, IA performed a review of the non-current assets physically present in around one-third of the company's stores. It was noted further that a significant number of assets which had not been fully depreciated were identified as obsolete by this review. 1 The company launched a significant internet campaign in January 2022 in order to increase revenue. The Company Directors reported that at the year-end. A current asset of KO.9M was to be recognised understanding that the advertisement were going to boost the sales. Due to actual and perceived misapplication of funds as a result of payment to ghost workers, Hulindos Ltd decided to outsource its payroll function to an external service organisation, which was tasked to perform all elements of the payroll cycle and sends monthly reports to the company with details of salaries and wages including the statutory obligations. In Mid- 2023, the company is planning to expand its operations by opening three new stores and in order to finance this, in October, 2022, the company obtained K20m bank Loan payable in arrears over five years in quarterly instalments. In the preparation for this expansion, the company is looking to streamline operations in the warehouses and is planning to declare redundant 200 employees after the year end. However, no decision has yet been made as to when this will be announced, but it is likely to be made at the end of 2023. The redundant employees were going to be paid all their outstanding dues with cheques attached to their letters of separation in line with the directives given by the Board of Directors. Required: (a). Describe EIGHT audit risks and explain the auditor's response to each risk in planning the audit of Hulindos Ltd (16 marks) (b). Define and explain what is meant by materiality and performance Audit (9 marks)
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Related Book For
Auditing An International Approach
ISBN: 978-0071051415
6th edition
Authors: Wally J. Smieliauskas, Kathryn Bewley
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