Your firm has been appointed as the auditor of Best Industries Limited (BIL) for the year ending 30 June 2019. BIL is a listed company and has three production plants. Plants A and B manufacture industrial chemicals whereas Plant C is used in the manufacturing of various cosmetic and skincare products. The following information has been gathered by the audit team:

1. Ghufran is the CEO and holds, directly and indirectly, the majority of the shareholdings in BIL. There are seven other directors on the board who meet four times a year to approve the quarterly financial statements and endorse the decisions taken by Ghufran during the quarter.

2. Considering the decline in demand of the products, BIL has taken the following decisions during the year: Close Plant B with effect from 31 August 2019. The public announcement of this decision was made on 15 April 2019. Introduce a new incentive package for distributors in January 2019 to boost the sales of industrial chemicals. The sales commission rate is dependent on achieving the various annual target levels set by the BIL’s management. Launch a customer loyalty program in February 2019 in which customers are awarded loyalty points on each purchase of cosmetic and skincare products from selected retail outlets and online stores. The management believes that this initiative would increase the demand of cosmetic and skincare products.

3. Staff at production and marketing departments are hired at low salaries but they are given high annual bonuses on achieving their targets.

4. Last year, BIL was selected for a tax audit in which the income tax department had disallowed certain business expenditures. BIL filed an application against the order issued by the income tax department. However, it lost the first appeal and has recently filed a second appeal to the relevant income-tax authority.

Required: 

Discuss the audit risks that exist in the above scenario and suggest the key audit procedures that you would perform to address those risks.

Answer rating: 100% (QA)

Inherent risk Inherent risk is the risk that the financial statements may contain material misstatement before considering any internal control proced... View the full answer