You are a senior audit in-charge of M/S AS associates audit organization. The audit manager instructed you
Question:
You are a senior audit in-charge of M/S AS associates audit organization. The audit manager instructed you to prepare an audit plan to start the audit for a public quoted company Orange Plc for the year ended 31st December 2020 the manufacture of electrical appliances for the building construction industry such as switches, plugs, cables etc. As per the unaudited draft financial statements the profit after tax was RO 35.5 million.
The senior in-charge attended the initial meeting with the directors of the Orange Plc and noted down the following points to plan and take appropriate action to go ahead with the audit.
- One of the Orange Plc subsidiary company is Smart Builders LLC. On 25th December 2020, the orange Plc CEO is also a director of Smart Builders LLC entered into a contract with Smart Builders LLC to supply building electrical accessories for an unusual price below the market price for a value of RO 350 million. The Orange Plc CEO justified that this transaction would build up a strong business relationship between the two companies.
- It has been noted based on the preliminary analytical procedure that the gearing ratio has increased sharply from 55% to 85% from 2019 to 2020. The directors have given couple of reason stating that the Orange Plc has issued bonds with attractive interest rate to start a new project on manufacturing temperature checking equipment to be installed in commercial building which cannot be visible. This project is expected to be commenced mid-September 2021. The loan sanctioned in early October 2020.
- The directors have commented that the inventory control system which was maintained in manual has been computerized in the mid of the year to improve the accuracy of inventory to serve the customers better. The cost incurred to the change was RO 21 million. The store manager worked for the Orange Plc for the last 20 years and planning to retire in 3 years’ time. No additional staff has been appointed to keep the cost down by the Orange Plc since the initial cost to change over is substantially high.
Task 1
Based on the above scenario, why is it necessary for M/S AS Associates, to understand the reasons for planning an audit and do risk assessment.
Corporate Finance Core Principles and Applications
ISBN: 978-0077905200
3rd edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford