You are currently planning the 30 June 20X11 audit of Treelop Ltd, an Australian owned company that produces and exports woodchips to Japan. Treelop’s operations are in Warrenup, in the south-west corner of Western Australia. Timber is purchased from forests nearby, processed into woodchips and immediately stockpiled for export. Woodchips are transported to Japan on charter vessels from Fremantle, which make an average of one trip a month. At a recent planning meeting with senior staff from Treelop, you obtain the following information.

• A massive conveyor belt is used to transport the woodchips from the mill to the stockpile.

The belt manufacturer was recently taken over by an overseas competitor, Bark Enterprises (Bark), which produces woodchips in several south-east Asian countries.

Bark has indicated that it is willing to sell equipment to Treelop at double the normal price because it is a competitor. It is doubtful whether any other companies in the world manufacture these belts. On current usage figures, it is expected that the current belt will last until December 20X2. When a replacement is required, it will take six months from order to delivery. It is unlikely that the company could sustain a six-month interruption to its operations. Management is deciding whether to order the belt from Bark or search for an alternative supplier.

• Timber is purchased in 50-hectare lots from plantations and state forests. The amount of timber sourced from state forests has been increasing over the last few years, angering environmental groups. Protests have been held in several forests and this has slowed production. In addition, several shipments of woodchips have been delayed, angering Japanese customers who are threatening to deduct 20 per cent from amounts owing as compensation for lost production time.

• In January, Treelop upgraded its accounts payable system to a fully integrated package that automatically updates the general ledger when creditor entries are made. There have been some problems with the creditors ledger, which is split into US dollar and Australian dollar amounts. Sometimes, US dollar amounts have been recorded as Australian dollar amounts, giving inaccurate creditor balances. During the last financial period, the Australian dollar remained steady against the yen, although it fell against the US dollar. Debtors are invoiced in US dollars at the time of shipment and payment is usually received about one month after the woodchips reach Japan. The ship takes about six weeks to reach Japan. Estimated turnover for the year is $20 million, down from $23 million in 20X0. Treelop expects to make a $500,000 profit for the year ended 30 June 20X1. Net assets for the company are expected to be

$2,500,000 at the end of 30 June 20X1.

Required

(a) Calculate a preliminary estimate of materiality for the audit of Treelop Ltd.

(b) Discuss the risks identified at the meeting and how they will affect the audit.