Background information

You are currently planning the 30 June 2016 audit of Super Grain Ltd (SGL), an Australian-owned company that produces and exports genetically modified grains to China.

The production of genetically modified food products has angered environmental groups. Protests have been held at several of SGLs farms, which has slowed production. As a result, several grain shipments have been delayed, angering the Chinese customers who are threatening to deduct 25% from amounts owing as compensation for their lost production time. A recent slowdown in the Chinese economy is also affecting forward orders, which have fallen by 20%.

A protester was injured recently when she was hit by farm machinery while trying to block the harvesting process. The protester is now suing SGL for damages, claiming the machinery operator was negligent and was acting on SGLs instructions. SGL is vigorously defending the case and appears to have a reasonable chance of winning; however, the adverse publicity being generated is making the government nervous about extending SGLs licence for producing genetically modified products.

One of SGLs Chinese customers, Super Flour, is claiming that the latest shipment of grain that it received was contaminated with a microbe due to the genetic modification that significantly reduced its quality and causing it to recall the flour that it was used to manufacture. Super Flour is refusing to pay its account, which is already three months overdue. SGL has launched an investigation into the allegations, but as yet has not been able to substantiate them.

At the start of the year, SGL upgraded its accounts payable system to a fully integrated package that automatically updates the general ledger when creditor entries are made. SGL has experienced some problems with the creditors ledger, which is split into $US and $AUD amounts, as SGL purchases its genetically modified seeds from the United States. In some instances, $US amounts have been recorded as $AUD, resulting in inaccurate creditor balances. There have also been problems with month-end rollovers with creditor balances being incorrectly re-set to zero at the first of every month. This has required each creditors history to be re-entered manually each month, a time-consuming process that is taking accounting staff away from their normal duties.

(a) For each of the following account items in SGLs financial statements, identify two (2) factors in the information provided that increase audit risk:

1. Accounts Receivable

2. Inventory

3. Accounts payable

4. Contingencies

(8 marks)

(b) Describe one (1) adjustment to be made to your audit plan in response to the audit risk associated with each of the factors identified in part (a).

(8 marks)

You may wish to present your answer in a table format, as follows: Item	(a) Two factors that increase audit risk	(b) Adjustment to be made to your audit plan for each factor
1. Accounts Receivable	1. 2.	1. 2

etc