Case

Assume that the new entity, AMT, was established, that the board accepted Helen Grants recommendation of an annual audit for the company, and that after conducting a tender for the audit, AMT selected ABC Auditors (ABCA) to conduct the audit. Unfortunately, Helen Grant found that, for personal reasons, she was unable to continue in the new role as CFO. The case continues

ABCA was selected to conduct the audit because one of the board members of AMT was aware of its reputation as an auditor in the wine industry where he was involved in a joint venture (a small winery) with one of the partners of AMT.

In the year first year of operation AMT made large investments in state-of-theart computer aided manufacturing equipment, obtained licenses to use the latest software programs, and significantly increased its research and development capability. It funded this expansion through a number of bank loans and a bank overdraft. In order to minimise risk, the board of AMT accepted a proposal from one of its major customers for a seat on the board in return for signing a 5 year contract to purchase one of AMTs main products a set price. As well, AMT sought to optimise operating cash flow by reducing executives base salaries and increasing the amount of bonuses that they could earn. The key performance indicator on which bonuses are to be calculated is accounting profit.

AMT has 3,600 active customers located across Australia. All sales are on credit, with outstanding accounts due within 30 days. Customers who pay within 7 days are given a 2% discount. Approximately 30% of customers represent 70% of the accounts receivable balance at year end.

In recent months, the Australian Dollar depreciated 35 % against the $US, which has made some of, AMTs inputs more expensive. Furthermore, rising interest rates in the Australian economy are putting pressure on some of AMTs major customers. Consequently, the new CFO, who joined AMT after many years in the building industry, is closely monitoring receivables.

The total balance of outstanding amounts owing from customers at balance date is $90m, for which the new CFO made a provision for doubtful debts of $450,000. She based this figure based on her reading of the records that Helen Grant kept while she was the senior accountant at AM.

Question

1. With reference to the facts of the case, identify three inherent risk factors that may because concern when planning the audit of AMT. Ensure these risks are specific to AMT and classify them as either a financial report level risk or an assertion level risk. (6 Marks)

2. Explain why the risk factors in (a) above are potential problems for the audit. That is, why could these factors increase the risk of misstatement in the financial statements of AMT? (9 Marks)

(c) For each of the three risks you have identified, state one significant Balance Sheet account that could at risk of material misstatement because of risk. For each account you have identified, provide a brief explanation of why it is a risk and identify the key assertions affected. (12 Marks)