Auditor

As audit senior in Carollo and Co and you are commencing the planning of the audit of this

new client, Celestial Co$,$ for the year ending $31$ August $2020.$

Client data

A sandals manufacturer, Celestial Company in business for $25$ years, with a production

facility, warehouse and administration offices operating from one central site.

Celestial sells all of its goods to large retail stores, with $70\%$ being to one large chain store

Shoetings. Celestial has a one year contract to be the sole supplier of sandals to Shoetings. It

secured the contract through significantly reducing prices and offering a four$-$month credit

period; the company$$s normal credit period is one month.

Operations

Two years ago Celestial reduced the level of goods directly manufactured and instead started

to import sandals from East Asia; approximately $70\%$ is imported and $30\%$ manufactured.

Purchase orders for overseas sandals are made six months in advance and goods can be in

transit for up to two months. Celestial accounts for the inventory when it receives the goods.

Within the production facility is a large amount of old plant and equipment that is now

redundant and has minimal scrap value.

In $2020$ Celestial has introduced a perpetual inventory counting system to avoid the

disruption of a year$-$end inventory count. The warehouse has been divided into $10$ areas and

these are each to be counted once over the year. The counting team includes a member of the

internal audit department and a warehouse staff member. The following procedures have

been adopted:

$$ The team prints the inventory quantities and descriptions from the system and these

records are then compared to the inventory physically present.

$$ Any discrepancies in relation to quantities are noted on the inventory sheets, including

any items not listed on the sheets but present in the warehouse area.

$$ Any damaged or old items are noted and they are removed from the inventory sheets.

$$ The sheets are then passed to the accounting department for adjustments to be made to

the records when the count has finished.

$$ During the counts there will continue to be inventory movements with goods arriving

and leaving the warehouse.

At the year$-$end it is proposed that the inventory will be based on the underlying records.

Traditionally, Celestial has maintained an inventory provision based on $1\%$ of the inventory

value, but management feels that as inventory is being reviewed more regularly it no longer

needs this provision.

Accountant

In May $2020$ Celestial had a dispute with its accountant and he immediately left the company.

The company has temporarily asked the accounting assistant to take over the role while they

recruit a permanent replacement. The former accountant has notified Celestial that he intends

to sue for unfair dismissal. The company is not proposing to make any provision or

disclosures for this, as they are confident the claim has no merit.

Required:

$($a$)$ Discuss the importance of assessing risks at the planning stage of an audit.

$($b$)$ Identify and explain the audit risks identified at the planning stage of the audit on

Celestial Co

$($c$)$ Discuss the ways in which Carollo$$s observations made during the course of the plant

tour will be of help in planning and conducting the audit; Carollo was required to tour

the client$$s plant facilities on acceptance of the engagement from Celestial Co