You are the audit supervisor of Tokota Associates and are currently planning the audit of your existing
Question:
You are the audit supervisor of Tokota Associates and are currently planning the audit of your existing client, Chipantepante PLC, a listed company. During a recent visit to the company you obtained the following information:
The management accounts for the first 10 months of the year show a significant increase in revenue and profit compared to the prior year. This was achieved by attracting new customers by offering extended credit. The new credit arrangements allow customers three months credit before their debt becomes overdue, rather than the one-month credit period allowed previously. As a result of this change, receivables days have increased from 55 to 123 days.
Unfortunately, there have been some recent reliability problems with the company’s products, which have resulted in legal claims being brought against the company by customers, and customers refusing to pay for the products. Partly as a result of this the chief financial officer and purchasing manager were dismissed on 15 August. A replacement purchasing manager has been appointed but it is not expected that a new chief financial officer will be appointed before the year-end of 31st January 2022. The accounts supervisor will be responsible for preparing the financial statements for audit.
The company installed a new computerised inventory control system which has operated from 1st June 2021. As the system records inventory movements and current inventory quantities the company is proposing to use the inventory quantities on the computer as a basis for the year-end inventory figure rather than carrying out a full year-end count as
has happened in previous years. Test counts have been carried out on a monthly basis.
Explain FIVE audit risks, and explain the auditor’s response to each risk, in planning the audit of Bridgford Products Co.
Auditing A Practical Approach
ISBN: 978-1119566007
3rd Canadian edition
Authors: Robyn Moroney, Fiona Campbell, Jane Hamilton, Valerie Warren