You are an audit senior for Mills & Co. Mills & Co were recently appointed as...

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You are an audit senior for Mills & Co. Mills & Co were recently appointed as external auditors of Sleeptight Co for the year ending 31 March 20X0 and you are in the process of planning the audit. The previous auditors issued an unmodified audit opinion last year and access to prior year working papers has been granted. Sleeptight's principal activity is the manufacture and sale of expensive high quality beds which are largely sold to luxury hotels and owners of holiday apartments. Each bed is crafted by hand in the company's workshop. Construction of each bed only begins once a customer order is received, as each customer will usually want their bed to have a unique feature or to be in a unique style. The business is family run and all the shares in Sleeptight are owned by the two joint Managing Directors. The directors are two sisters, Anna and Sophie Jones and they both have a number of other business interests. As a result they only spend a few days a week working at the company and rely on the small accounts department to keep the finances in order and to keep them informed. There is no finance director but the financial controller is a qualified accountant. Sleeptight requires customers who place an order to pay a deposit of 40% of the total order value at the time the order is placed. The beds will take four to eight weeks to build, and the remaining 60% of the order value is due within a week of the final delivery. Risks and rewards of ownership of the beds do not pass to the customer until the beds are delivered and signed for. Beds also come with a two year guarantee and the financial controller has made a provision in respect of the expected costs to be incurred in relation to beds still under guarantee. Although the company does have some employees working in the workshop, it often uses external subcontractors to help make the beds in order to fulfil all its orders. These sub-contractors should invoice Sleeptight at the end of each month for the work they have carried out, but sometimes do not get round to it until the following month. The company undertakes a full count of raw materials at the year end. The quantities are recorded on inventory sheets and the financial controller assigns the costs based on the cost assigned in the previous year or, if there was no cost last year, using the latest invoice. Most beds are made of oak or other durable woods and the cost of these raw materials is known to fluctuate considerably. It is expected that work in progress will be insignificant this year, but there will be a material amount of finished goods awaiting despatch. Anna Jones will estimate the value of these finished goods and has said she will take into account the order value when doing so. There has been steady growth in sales in recent years and, in January 20X0 Sleeptight purchased a building close to its existing workshop. Anna and Sophie plan to turn this into another workshop which should more than double its existing manufacturing capacity. The new workshop is currently undergoing extensive refurbishment in order to make it suitable for bed manufacturing. The purchase of the new premises was funded by a bank loan repayable in monthly instalments over 12 years and has covenants attached to it. These covenants are largely profit related measures and if they are breached the bank has the option to make the remaining loan balance repayable immediately. REQUIRED: Identify and explain EIGHT audit risks in respect of the financial statements of Sleeptight for the year ending 31 March 20X0. For each risk suggest a suitable audit response You are an audit senior for Mills & Co. Mills & Co were recently appointed as external auditors of Sleeptight Co for the year ending 31 March 20X0 and you are in the process of planning the audit. The previous auditors issued an unmodified audit opinion last year and access to prior year working papers has been granted. Sleeptight's principal activity is the manufacture and sale of expensive high quality beds which are largely sold to luxury hotels and owners of holiday apartments. Each bed is crafted by hand in the company's workshop. Construction of each bed only begins once a customer order is received, as each customer will usually want their bed to have a unique feature or to be in a unique style. The business is family run and all the shares in Sleeptight are owned by the two joint Managing Directors. The directors are two sisters, Anna and Sophie Jones and they both have a number of other business interests. As a result they only spend a few days a week working at the company and rely on the small accounts department to keep the finances in order and to keep them informed. There is no finance director but the financial controller is a qualified accountant. Sleeptight requires customers who place an order to pay a deposit of 40% of the total order value at the time the order is placed. The beds will take four to eight weeks to build, and the remaining 60% of the order value is due within a week of the final delivery. Risks and rewards of ownership of the beds do not pass to the customer until the beds are delivered and signed for. Beds also come with a two year guarantee and the financial controller has made a provision in respect of the expected costs to be incurred in relation to beds still under guarantee. Although the company does have some employees working in the workshop, it often uses external subcontractors to help make the beds in order to fulfil all its orders. These sub-contractors should invoice Sleeptight at the end of each month for the work they have carried out, but sometimes do not get round to it until the following month. The company undertakes a full count of raw materials at the year end. The quantities are recorded on inventory sheets and the financial controller assigns the costs based on the cost assigned in the previous year or, if there was no cost last year, using the latest invoice. Most beds are made of oak or other durable woods and the cost of these raw materials is known to fluctuate considerably. It is expected that work in progress will be insignificant this year, but there will be a material amount of finished goods awaiting despatch. Anna Jones will estimate the value of these finished goods and has said she will take into account the order value when doing so. There has been steady growth in sales in recent years and, in January 20X0 Sleeptight purchased a building close to its existing workshop. Anna and Sophie plan to turn this into another workshop which should more than double its existing manufacturing capacity. The new workshop is currently undergoing extensive refurbishment in order to make it suitable for bed manufacturing. The purchase of the new premises was funded by a bank loan repayable in monthly instalments over 12 years and has covenants attached to it. These covenants are largely profit related measures and if they are breached the bank has the option to make the remaining loan balance repayable immediately. REQUIRED: Identify and explain EIGHT audit risks in respect of the financial statements of Sleeptight for the year ending 31 March 20X0. For each risk suggest a suitable audit response

Answer rating: 100% (QA)

Solution 1 The firm has recently been appointed as auditor There is a lack of cumulative knowledge understanding of the business which may result in a ... View the full answer