Case 5 One Plus Technology Is non public company, based in Frankfurt, Germany, manufacturing IT products ranging from computer monitors to optical storage devices. In recent years, the IT product manufacturing industry has suffered from intense competition in the market as well as soaring labour and material costs. During the year, a number of IT product manufacturers in the region faced serious financial problems and were closed down. OnePlus Technology acquired a new division (the "Division") in February. The Division is a software developer and solution provider on IT systems based in Seoul, South Korea. This year, the Division started providing bundled sales for its soft-ware and three-to five-year after-sale maintenance services at a discounted price. Sandra She, CPA, is the manager-in-charge of OnePlus Technology. She assigned the audit of the sale and collection cycle to Carol Sze, a senior audit associate. Carol gathered preliminary financial information for the sales of OnePlus Technology (the "Existing Segment"), and included the performance of the Division as another segment, in the financial statements: Total Existing Segment The Division ($'000) Current year Prior year Current year Prior year Current year Prior year Sales 5,300 6,400 1,200 6,500 6,400 Cost (4,300) (4,700) (400) (4,700) (4,700) Gross profit 1,000 1,700 800 1,800 1,700 Carol performed the following audit work for the sales and collection cycle: 1. In the planning section, Carol noted that sales and accounts receivable are closely related. After documenting that the approach for designing tests of controls and sub- stantive tests of transactions, she put "Same as the above" for her methodology in designing tests of details of balance in the cycle. 2. She calculated the gross margin based on the total sales. She noted that the gross margin of current year was 28% while that of prior year was 27%. She concluded that there was no material fluctuation and therefore there should not be any change to the audit strategy for the sales and collection cycle. 3. Based on preliminary discussion with the management, the Division had its own account- ing manual and procedures. Carol scrutinized that it included proper revenue recognition policies in accordance with relevant accounting standards. She selected a few samples of revenue recognized by the Division during the year and noted that the Division booked the entire amount of cash receipts from the bundled sales for software and after-sale ser- vices as sales in the sales journal with no discrepancy. She was satisfied with the results. 4. OnePlus Technology has excellent internal controls over the sales and collection cycle, including segregation of duties in the sales and credit department, prenumbered sales invoices and independent checks by senior accountant. In the past, extensive tests of control were used and there was limited substantive test for the audit. There has been no material adjustment entry arisen from the audit. Carol was very familiar with the internal controls of OnePlus Technology as she did the system walkthrough in the previous audit engagements. She was satisfied with the internal controls over the sales and collection cycle. Carol justified that the Division is engaging in a similar industry and understanding the internal controls of the Division was therefore not necessary. Further, the internal au- ditors of the Division checked the internal controls regularly. Carol therefore assessed the risk level to be low and adopted the usual audit approach for the sales and collection cycle. 5. Carol documented in her working paper that no exceptions were noted in the cycle. Required Assume you are Sandra She. You are reviewing the audit file prepared by Carol. Critically evaluate her audit work on the sales and collection cycle. Case 5 One Plus Technology Is non public company, based in Frankfurt, Germany, manufacturing IT products ranging from computer monitors to optical storage devices. In recent years, the IT product manufacturing industry has suffered from intense competition in the market as well as soaring labour and material costs. During the year, a number of IT product manufacturers in the region faced serious financial problems and were closed down. OnePlus Technology acquired a new division (the "Division") in February. The Division is a software developer and solution provider on IT systems based in Seoul, South Korea. This year, the Division started providing bundled sales for its soft-ware and three-to five-year after-sale maintenance services at a discounted price. Sandra She, CPA, is the manager-in-charge of OnePlus Technology. She assigned the audit of the sale and collection cycle to Carol Sze, a senior audit associate. Carol gathered preliminary financial information for the sales of OnePlus Technology (the "Existing Segment"), and included the performance of the Division as another segment, in the financial statements: Total Existing Segment The Division ($'000) Current year Prior year Current year Prior year Current year Prior year Sales 5,300 6,400 1,200 6,500 6,400 Cost (4,300) (4,700) (400) (4,700) (4,700) Gross profit 1,000 1,700 800 1,800 1,700 Carol performed the following audit work for the sales and collection cycle: 1. In the planning section, Carol noted that sales and accounts receivable are closely related. After documenting that the approach for designing tests of controls and sub- stantive tests of transactions, she put "Same as the above" for her methodology in designing tests of details of balance in the cycle. 2. She calculated the gross margin based on the total sales. She noted that the gross margin of current year was 28% while that of prior year was 27%. She concluded that there was no material fluctuation and therefore there should not be any change to the audit strategy for the sales and collection cycle. 3. Based on preliminary discussion with the management, the Division had its own account- ing manual and procedures. Carol scrutinized that it included proper revenue recognition policies in accordance with relevant accounting standards. She selected a few samples of revenue recognized by the Division during the year and noted that the Division booked the entire amount of cash receipts from the bundled sales for software and after-sale ser- vices as sales in the sales journal with no discrepancy. She was satisfied with the results. 4. OnePlus Technology has excellent internal controls over the sales and collection cycle, including segregation of duties in the sales and credit department, prenumbered sales invoices and independent checks by senior accountant. In the past, extensive tests of control were used and there was limited substantive test for the audit. There has been no material adjustment entry arisen from the audit. Carol was very familiar with the internal controls of OnePlus Technology as she did the system walkthrough in the previous audit engagements. She was satisfied with the internal controls over the sales and collection cycle. Carol justified that the Division is engaging in a similar industry and understanding the internal controls of the Division was therefore not necessary. Further, the internal au- ditors of the Division checked the internal controls regularly. Carol therefore assessed the risk level to be low and adopted the usual audit approach for the sales and collection cycle. 5. Carol documented in her working paper that no exceptions were noted in the cycle. Required Assume you are Sandra She. You are reviewing the audit file prepared by Carol. Critically evaluate her audit work on the sales and collection cycle