You are the senior auditor in charge of the audit of Potholders Ltd, a retailer of...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are the senior auditor in charge of the audit of Potholders Ltd, a retailer of garden pots. Your audit firm has been the auditor for the last four years. Historically, the firm has had a competent and qualified internal audit team upon whose work you have placed significant reliance. Management is well respected and is viewed to have high integrity, although there was some friction last year when the auditor discovered sales cut-off errors, which reduced profit and which had an adverse impact on management bonuses under the new bonus scheme. While the company has been very profitable, the drought and water restrictions have placed pressure on management to maintain profitability. In planning the audit you become aware of the following facts: ) There is a cash shortage caused by recent expansions and falls in cash inflow i) The accounts payable balance has increased by 30 per cent last year. i) Debtors' collection period has increased from 45 days to 63 days. iv Due to the difficulty of maintaining sales levels, credit checks are not always carried out. v) Internal audit department staff levels have been reduced. vi) After a recent series of thefts, control over inventory has been tightened. When goods are received, they are counted and inspected and, after a pre-numbered goods received advice is prepared, the goods are moved to an enclosed storage area with adequate security including closed circuit TV. Goods are released from the store only upon receipt of a properly authorized requisition form. vii) In the past, all purchases were made centrally at head office. However, store managers are now asked/allowed to purchase direct from local suppliers in order to obtain inventory at lower prices and avoid transport costs. Some store managers are importing from Indonesia. Required: a) Discuss facts that increase inherent risks at the financial statement level. (12 marks) b) Discuss inherent risks at the account level for inventory and accounts receivable.(12 marks) O Discuss facts that increase or decrease control risk. (12 marks) You are the senior auditor in charge of the audit of Potholders Ltd, a retailer of garden pots. Your audit firm has been the auditor for the last four years. Historically, the firm has had a competent and qualified internal audit team upon whose work you have placed significant reliance. Management is well respected and is viewed to have high integrity, although there was some friction last year when the auditor discovered sales cut-off errors, which reduced profit and which had an adverse impact on management bonuses under the new bonus scheme. While the company has been very profitable, the drought and water restrictions have placed pressure on management to maintain profitability. In planning the audit you become aware of the following facts: ) There is a cash shortage caused by recent expansions and falls in cash inflow i) The accounts payable balance has increased by 30 per cent last year. i) Debtors' collection period has increased from 45 days to 63 days. iv Due to the difficulty of maintaining sales levels, credit checks are not always carried out. v) Internal audit department staff levels have been reduced. vi) After a recent series of thefts, control over inventory has been tightened. When goods are received, they are counted and inspected and, after a pre-numbered goods received advice is prepared, the goods are moved to an enclosed storage area with adequate security including closed circuit TV. Goods are released from the store only upon receipt of a properly authorized requisition form. vii) In the past, all purchases were made centrally at head office. However, store managers are now asked/allowed to purchase direct from local suppliers in order to obtain inventory at lower prices and avoid transport costs. Some store managers are importing from Indonesia. Required: a) Discuss facts that increase inherent risks at the financial statement level. (12 marks) b) Discuss inherent risks at the account level for inventory and accounts receivable.(12 marks) O Discuss facts that increase or decrease control risk. (12 marks)
Expert Answer:
Answer rating: 100% (QA)
solution of this problem is given below Whats is inherent risk Inherent risk is the risk posed by an error or omission in a financial statement due to a factor other than a failure of control In a fin... View the full answer
Related Book For
Auditing and Assurance Services
ISBN: 978-0077862343
6th edition
Authors: Timothy Louwers, Robert Ramsay, David Sinason, Jerry Straws
Posted Date:
Students also viewed these accounting questions
-
You are the senior auditor in charge of the annual audit of Onward Manufacturing Corporation for the year ending December 31. The company is of medium size with only 300 employees. All 300 employees...
-
You are the senior auditor in charge of the December 31, 2015, year-end audit for Cleo Patrick Cosmetics Inc. (CPCI). CPCI is a large, privately held Canadian company that was founded in 1996 by one...
-
You are the senior auditor in charge of the December 31, 2018, year-end audit for Cleo Patrick Cosmetics Inc. (CPCI). CPCI is a large, privately held Canadian company that was founded in 1999 by one...
-
Suppose the United States imposes a tariff on imported sugar. What are the consequences of this on consumers, domestic and foreign producers, and land use?
-
Refer to Exercise14.52; 99%. Procedure 14.2 Regression t-Interval Procedure Purpose To find a confidence interval for the slope, 1, of the population regression line Assumptions The four assumptions...
-
The situation described below was adapted from a case published by the institute of Management Accountants Committee on Ethics. WIW is a publicly owned corporation that makes various control devices...
-
Are systematic and unsystematic environmental risks related? Why, or why not? Are banks concerned about systematic environmental risks? Are insurance companies concerned about unsystematic...
-
In environmental engineering (a specialty area in civil engineering), the following equation can be used to compute the oxygen level c (mg/L) in a river downstream from a sewage discharge : c = 10 ...
-
1.A company produces plastic kitchenware and uses costing system. Products go through three departments- Mixing, Molding, and Packaging. During the month of August, the following information made...
-
Regional Airlines is establishing a new telephone system for handling flight reservations. During the 10:00 A.M. to 11:00 A.M. time period, calls to the reservation agent occur randomly at an average...
-
The department production report of Peninsula Company for August is summarized below: Assembly Finishing Department Department Quantity: Started in Production - Current Month 2,000 -0- Transferred in...
-
Sunburst Bakeries is a supplier of all kinds of bread and cakes to leading Australian supermarkets. It has several huge factories, each specializing in the production of a limited range of goods. For...
-
Diversity in the Workplace Share an article that shows an example of the importance of cultural diversity in the global workplace. As Christians, how can we promote diversity in our future workplaces?
-
Over 600 people die each year in New Mexico from opioid overdoses. Officials have called the current opioid epidemic the worst drug crisis in American history. Overdose is now the leading cause of...
-
0-1-1-9 Solve the equation. Check your solutions.
-
Divide. 2 7x5 +5x -X 2 Simplify your answer as much as possible.
-
Company ending inventory and cost of goods sold under different cost flow assump6ons. REI had 300 YeP mugs on hand at January 2, 2023, cosPng $16 each. Purchases and sales of YeP mugs during the...
-
Show that, given a maximum flow in a network with m edges, a minimum cut of N can be computed in O(m) time.
-
Jones, CPA, audits a number of public-companies. During the past year, some deficiencies with respect to audits conducted for two of Joness clients in the software industry (SoftWare and...
-
What defenses are available to auditors against suits brought by clients under common law? Against suits brought by third parties under common law?
-
On January 1, Graham Company purchased land (the site of a new building) for $ 100,000. Soon thereafter, the state highway department announced that a new feeder road would run next to the site. The...
-
Use the Allstott 2020 income statement that follows and the balance sheet from exercise 10-6 to compute the following: a. Allstott's rate of inventory turnover and days inventory outstanding for 2020...
-
Use the financial statements of Allstott, Inc., in exercises 10-6 and 10-7. 1. Compute the company's debt ratio at December \(31,2020\). 2. Compute the company's times-interest-earned ratio for 2020....
-
Use the financial statements of Allstott, Inc., in cxercises 10-6 and 10-7 to compute the following profitability measures for 2020. Show each computation. a. Return on sales b. Asset turnover c....
Study smarter with the SolutionInn App