AUDIT OF PRODUCTION, FINANCIAL AND REPUTATIONAL RISKS

AT ADVENTURELAND TOYS COMPANY

The board of directors of AdventureLand Toys, a medium sized soft toys manufacturing company based in Sydney, has decided to ask their internalaudit committeeto carry out a detailed audit of risks within the business and its supply chain.

Unpredicted/unforeseenriskshavecrystallised/emerged recently that havecostthe company a large amount of money. This business has always placed a high level of importance on monitoring the quality of its finished products. Most of the internal audit department's work has been focussed on ensuring that the quality control processes are carried outproperly. Despite this, a batch of new toys called 'Bounce Back boomerangs', made of a new and very soft type of imported plastic, had to be taken off the market and buyers refunded because of a toxic substance that was discovered in the soft plastic. This new kind of plastic was not fully safety tested as part of the finished product check.

The raw material cost of the new plastic also increased dramatically due to an unforeseen 500% increase in shipping costs as a result of the Covid pandemic.

Bothissues - the faulty new product, and rising transport costs -weremadeworseby the rapid growth the business experienced when online sales of 'Bounce Back boomerangs' reached unexpectedly high levels afteritwasadoptedasasymbolbythe youthprotestmovement against recent Climate Change related extreme weather events including catastrophic bushfires followed by floods inAustralia

The head of the internal audit committee, HR Manager Osim Shrestha, is instructed by the Board and the CEO to supervise a new risk audit of the supply chain. He requests permission to recruit extra staff to carry out this extensive risk audit work. However, he thinks that the extra staff will only need to be appointed on temporary contracts, because the detailed risk auditing of the supply chain should only need to be carried out once. Then after it is completed, it should only need to be updated annually to include any major changes to inputs and logistics.

Required:

YOUare a 'rising star' accountant in AdventureLand Toys.HR Manager Osim Shrestha asks you to assist him bydraftingthe comprehensive risk audit report that must be presented to the Board:

Q1: Apply the TARA and ALARP models to identifythe key strategicand operational risk factors that should be included in the internalaudit of the supply chain (4 marks).

(Professional Skills: demonstrate your evaluationskills in assessing the key risk factors to be considered).

Transfer:

Avoid:

Reduce:

Accept:

Q 2: Explainto the Board that externalauditors are required to independently review the results of internal risk auditof the supply chain (3 marks).

(Professional skills marks: demonstrate your communicationskills in persuading Mr Shrestha, the CEO and the Board to useexternalauditors.)

Q 3: ChallengeHR Manager Shrestha's assumption that this internal risk audit of the supply chain will only need to be reviewed annually. Demonstrate to him the reasons why it should be reviewed more frequently (3 marks).(Professional skills marks: demonstrate scepticismskills in challenging HR Manager Shrestha's views.)