Auditing$-$

You are an Audit Senior of Foster and Associates Limited and are planning the audit of Blackberry Co for the year ending $31$ March $2018.$ The company is a manufacturer of portable music players and your audit manager has already had a planning meeting with the Finance Director. Forecast revenue is $$686$m and profit before tax is $$42$m$.$ She has provided you with the following notes of the meeting:

Planning meeting notes:

$1.$ Inventory is valued at the lower of cost and net realisable value. Cost is made up of the purchase price of raw materials and costs of conversion, including labour, production and general overheads. Inventory is held in three warehouses across the country. The company plans to conduct full inventory counts at the warehouses on $2,3$ and $4$ April, and any necessary adjustments will be made to reflect post year$-$end movements of inventory. The internal audit team will attend the counts.

$2.$ During the year, Blackberry Co paid $$11$m to purchase a patent which allows the company the exclusive right for three years to customise their portable music players to gain a competitive advantage in their industry. The $$11$m has been expensed in the current year statement of profit or loss. In order to finance this purchase, Blackberry Co raised $$12$m through issuing of additional shares.

$3.$ In November $2017,$ it was discovered that a significant teeming and lading fraud had been carried out by four members of the Sales Department who had colluded. They had stolen funds from wholesale customer receipts and then to cover this, they allocated later customer receipts against the older receivables. These employees were all reported to the police and subsequently dismissed. As a result of the vacancies in the Sales Department, Blackberry Co decided to outsource its sales ledger processing to an external service organisation. This service organisation handles all elements of the sales ledger cycle, including sales invoicing and chasing of receivables balances and sends monthly reports to Blackberry Co detailing the sales and receivable amounts. Blackberry Co ran its own sales ledger until $31$ January $20$X$8,$ at which point the records were transferred to the service organisation.

$4.$ In January $2017,$ a receivable balance of $$09$m was written off by Blackberry Co as it was deemed irrecoverable as the customer had declared itself bankrupt. In February $2018,$ the liquidators handling the bankruptcy of the company publicly announced that it was likely that most of its creditors would receive a pay$-$out of $40\%$ of the balance owed. As a result, Blackberry Co has included a current asset of $$360,000$ within the statement of financial position and other income in the income statement.

Required:

a$.$ Describe Foster and Associated Limited responsibilities in relation to the prevention and detection of fraud and error. $(20$ marks$)$

b$.$ Describe EIGHT audit risks and explain the auditor$$s response to each risk in planning the audit of Blackberry Co$.$ Note: Prepare your answer using two columns headed Audit risk and Auditor$$s response respectively. $(80$ marks$)$

Topics Covered in the Course Work

$1.$ First Scenario $-$Inventory

Approach:

$$ Research the risk associated with Inventory

$$ State the action of the auditor to audit the inventory to mitigate the risk of misstatement in the financial statements.

$2.$ Second Scenario

Topics:

$$ intangible asset$-$ patent

$$ Is the treatment of the cost of the patent correct?

$$ The issue of the additional shares for $$1\mathrm{.}2$m$.$ What is the proper treatment

Approach:

$$ Research the risk associated with intangible assets

$$ Has it been treated properly in the financial statement?

$$ State the action the auditor to audit this transaction

$3.$ Third Scenario:

Topics:

$$ Fraud took place in the company

$$ Outsourcing of the Sales Ledger function

Approach:

$$ Research the risk associated with fraud

$$ Has fraud be properly investigated

$$ State the action the auditor to audit the fraud

$$ Are there risk involve in outsourcing the sales ledger function? How should the auditor audit this outsourcing company?

$4.$ Fourth Scenario:

Topics

$$ Bankrupt of a customer $($Receivables$)$

$$ Portion of the receivables is recoverable

Approach

$$ Research the risk associated with receivables

$$ State the action of the auditor in regard to the bankrupt customer

$$ Ascertain the correct amount to be received from the liquidator and how should this be treated in the financial statement?