(Reqirement: Answer Question 1 & 2)

Audit Planning & Risk Assessments

Read ISA (NZ) 220: Quality control for an audit of financial statements; ISA (NZ) 210: Agreeing the terms of audit engagements; ISA (NZ) 300: Planning an audit of financial statements; ISA (NZ) 315: Identifying and assessing the risks of material misstatement through understanding the entity and its environment and ISA (NZ) 330: The auditor's responses to assessed risks.

a. Acceptance of an Audit Client

Craddock Vaugh, the managing director (MD) of Vospa Ltd approached your audit partner regarding the audit of the company for the year ended 31 December 20X3. Vospa Ltd is a large public company. It manufactures and sells jewellery. Its manufacturing factory is situated in Whangarei and its head office and ten retail outlets in Auckland. The company also sells to other independent retailers in the high-end jewellery market. Vospa Ltd was previously audited by Evan & Co., but at the end of last year's audit, there was a dispute between the managing director Vaugh and the previous auditors over:

(a)the proper valuation of the work-in-progress

(b)the inclusion in sales of inventory that has not been paid for nor delivered

This dispute led to Vaugh's decision to change the company auditors. As an audit manager, you have been asked by your audit partner to assess whether this new client should be accepted. You asked Vaugh, the MD for his permission to confer with the previous auditors. He agreed although he mentioned that he could not see any need for you to contact the previous auditors. He also indicated that he was glad to change auditors because he had enough of their "nit-picking".

Question 1:

Explain the steps to take in deciding whether to accept this new client?

b. Preliminary Risks Assessments

Your preliminary assessment of Vospa Ltd led to the acceptance of this audit client. As manager, you are in charge of this audit client and you are now required to plan the audit. During a visit to the client's head office in Auckland, you managed to gather the following information from the MD and his staff:

1)The personnel in the centralised accounting department are competent but seemed somewhat overworked and underpaid relative to the other employees.

2)The accounting system is computerised and the processing is centralised at head office in Auckland. The computer equipment and software were upgraded last June. This should potentially improve the record keeping.

3)The company has an internal audit department.

4)Stock-take will be held on balance date 31 December 20X3 at the different locations.

5)Vaughn Craddock, the MD is also a shareholder of the company.

6)His niece Sheila Webb is the Financial Controller. She is responsible for all the accounting and the administration of the company.

7)The MD is proud of his group of aggressive young sales executives. They receive relatively low salaries. However, a high proportion of their income is a result of an unusually generous profit-sharing plan.

8)You were told that one of the retail staff members was caught stealing jewellery from the store where she worked. She confessed that she has been stealing jewellery regularly over a period of 3 months. However, it was only in the last month that she was caught in the act.

9)Even though the industry as a whole has suffered dramatic setbacks in recent years, Vospa Ltd continues to prosper, as evidenced by its constantly increasing earnings and growth. However, it is only in the last year that sales were declining due to the recession.

10)At present the bankers are willing to continue the company loan. However, the loan agreement is due for renewal in March next year. Providing the bank with a copy of Vospa's audited annual accounts is a condition of the loan agreement.

11)Vospa Ltd has 40% holding in one other private company, Telco Ltd. Telco markets Vospa's jewellery locally and overseas.

Question 2:

a)Identify the major audit risks concerns (risk factors) you have for Vospa Ltd

b)Explain how the risk concerns would impact on financial statements (ie. by way of misstatements, omissions, distortions and non-disclosures) or the audit.

c)Discuss the audit strategies or procedures to address the impact on financial statement in (b)

Present your answers as follows:

• Major concerns identified
• Impact on financial statements
• Audit strategies or procedures