Knowledge of the Business. Constantijn &

Nianias, Soma Orkaton Logistons (SOLs), have been hired to audit Eidola Company, a biochemical company listed on the Athens Stock Exchange. Constantijn 8 Nianias is auditing; the client for the first time in the current year +s a result of a dispute between Eidola and the previous auditor over the proper booking of sales and accounts receivable for sales of inventory that has not been delivered but has for practical purposes been completed and sold.

Eidola has been grown from a small start-up to a highly successful company in the industry in the past seven years, primarily as a result of many successful mergers negotiated by George Panis, the president and chairman of the board.

Although other biotech firms have had difficulty in recent years, Eidola continues to prosper, as shown by its constantly increasing earnings and growth. Bayer, the large German chemical company, has a special discount contract with them and represents 15 per cent of their sales. In the last year, however, the company’s profits turned downwards.

Panis is generally supported by his board of directors that include many of his old university classmates. The board, which meets twice annually, recently issued a policy on corporate ethics conduct. Panis says he owes much of his success to the hiring of aggressive young executives paid relatively low salaries combined with an unusually generous profit-sharing plan.

The corporate structure is very informal as Panis does not believe that any employee should have a title or a specific job description as it ‘gives people airs’. Panis’s only corporate objective is ‘to make large profits so our stock price will increase and our shareholders will be happy’.

The management information system at Eidola is very limited and they lack sophisticated accounting records for a company that size. The information system will be updated this year. The personnel in the accounting department are competent but somewhat overworked and underpaid relative to the other employees, and therefore turnover is high. The most comprehensive records are for production and marketing because Panis believes these areas are more essential to operations than accounting.

There are only four internal auditors and they spend the majority of their time taking inventories, which is time-consuming because inventories are located at 11 facilities in four countries.

The financial statements for the current year include a profit 20 per cent less than the last year, but the auditors feel it should be a larger decrease because of the reduced volume and the disposal of a segment of the business, Kata-Karpos. The disposal of this segment was considered necessary because it had become increasingly unprofitable over the past three years. When it was acquired from Christopher Panis, George Panis’s brother, it was considered profitable even though its largest customer was Kata-Klino, also owned by Christopher Panis.

Eidola is considered under-financed by market analysts. There is excessive current debt and management is reluctant to sell equity on the capital markets because increasing the number of shares will decrease share price. George Panis is now talking to several large companies in hopes of a merger.

Required

A. What matters should the auditors, Constantijn & Nianias, SOLs, consider in acquiring knowledge of the company? Briefly discuss.

B. What techniques should the auditors use to gather the necessary information?