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Area of study: ACCA Auditing

7. ChemEdge You are an audt senior in Rudeks and Co and you are commencing the planning of the audit of ChemEdge Pastel Co (ChemEdge) for the year ending 31 August 200. ChemEdge is a paint manufacturer and has been trading for over 50 years. It operates from one central site which includes the production facility, warehouse and administration offices. ChemEdge sells all of its goods to large home improvement stares, with 605 being to one large chain store called Homewares. The company has a one year contract to be the sole suppler of paint to Homewares. If secured the contract through significantly reducing prices and offering a four-month credit period, the company's normal credit period is one month. Goods in/purchases In recent years, ChemEdge has reduced the level of goods directy manufactured and instead started to import paint from South Asia. Approximately 6ost is imported and 40% manufactured. Within the production facilly is a large amount of old plant and equipment that is now redundant and has minimal acrap value. Purchase orders for overseas paint are made six months in advance and goods can be in transit for up to two months. ChemEdge accounts for the inventory when it receives the goods. To avoid the disruption of a year end inventory count ChemEdge has this year introduced a continuousperpotual inventary courting system. The warehouse has been divided into 12 aress and these are each to be counted once over the year. The counting team includes a member of the intemal audit departiment and a warehouse staff member. The following procedures hwe been adapted; 1. The fearn prints the inventory quartities and descriptions trom the system and these records are then compared to the inventory physicaly present 2. Any discrepancies in relation to quantities are noted on the imentiry sheets. inctuding any kems not listed on the sheets but present in the warehouse area. 3. Any damaged or old items are noted and they are removed from the inventory sheets. 4. The sheets are then passed to the finance depentment for adustments to be made to the records when the count has finished. 5. During the counts there will continue to be inventory movements with goods arriving and ieaving the warehouse. At the year end it is proposed that the inventary will be based on the underfying recards. Traditionaly ChemEdge has maintained an inventory provision based on 1% of the inventary value, but management foels that as inventory is being reviewed more regularly it no longer needs this provision. Finance Director In May 200 ChemEdge had a dispute with its finance director (FD) and he immediately feft the company. The compary has femporanly asked the financial controller to take over the role while they recruit a permanent replacement. The old FD has notiled ChemEdge that he intends to sue for unfair dismistal. The company is not proposing to make any provision or disclosures for this, as they are confident the claim has no menit. Required (a) Identify and explain the audit risks identifed at the planning stage of the audit of ChemEdge Pastel Co. ( 10 marks) (b) Discuss the importance of assessing risks at he planning stage of an audit. (4 marks)