Today is 15 April 2020. You are an audit manager of QUTPG Partners and are planning the audit of RST Co for the year ending 30 June 2020. The company is a manufacturer of digital devices and your have already had a planning meeting, with the finance director. Forecast revenue is $137.2m and profit before tax is $8.4m. The following notes from the planning meeting have been given to you.

Planning Meeting Notes

• RST Co holds inventory in four warehouses in Brisbane, Sydney, Melbourne, and Canberra respectively. RST Co plans to conduct a full inventory stocktake at the warehouses on 1, 2, 3 and 4 July. Any necessary adjustments will be made to reflect post year-end movements of inventory. RST Co has an internal audit function and an internal audit team will attend the inventory counts. Inventories are measured at the lower of cost and net realisable value. Cost includes the purchase price of raw materials, labour and other production costs, and other general overheads including head office administrative costs.
• During the year, RST Co paid $2.2m to purchase a patent which allows the company the exclusive right for five years to customise their portable audio player to gain a competitive advantage in the market. The $2.2m has been expensed in the current year statement of profit or loss. To finance this purchase, RST Co raised $2.4m through new share issuance.
• It was discovered that, in January 2020, a significant fraud had been colluded by four employees in the sales ledger department by stealing funds from wholesale customer receipts. They allocated later customer receipts against the older receivables to cover the stolen funds. RST Co had reported to the police and subsequently dismissed the four employees.
• As a result of the vacancies in the sales ledger department, RST Co has outsourced its sales ledger processing to U Services, an external service organisation since 1March 2020. U Services handles all elements of the sales ledger cycle, including sales invoicing, chasing receivables balances, and sending monthly reports of sales and receivable amounts to RST Co.
• In December 2019, the financial accountant of RST Co was dismissed. He had been employed by the company for ten years, and he has threatened to sue the company for unfair dismissal. Until his replacement commences work in March, the financial accountant’s responsibilities have been allocated to other staff in the finance department. However, in January and February 2020, no reconciliations of supplier statement have been performed, and no reconciliations of purchase ledger control account have been performed.
• In January 2019, a receivable balance of $1.8m was written off by RST Co when a customer had declared bankruptcy. In February 2020, the liquidators of the customer company publicly announced that it was likely that most of its creditors would receive a pay-out of 30% of the balance owed. As a result, RST Co has included a current asset of $540,000 in the balance sheet and other income in the statement of profit or loss.

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• Required:

  (a) Describe QUTPG Partners’ responsibilities in relation to the prevention and detection of fraud and error.

  (b) Describe EIGHT audit risks, and explain the auditor’s response to each risk in planning the audit of RST Co.

Answer rating: 100% (QA)

1 Fraud is an intentional act by one or more indivisuals among management those charged with governance employees or third parties involving use of deception to obtain an unjust or illegal advantage A... View the full answer