CASE STUDY You joined a large accounting firm, KPMJ Partners, as an audit senior. After orientation and training sessions, you were part of a team to audit Tasty Beef Ltd (TBL thereafter) for the financial year ended 30 June 2021.

Tasty Beef Ltd Audit Memo Company Background

Prepared by: Dale Smith

Date: 18 June 2021

Tasty Beef Ltd is a Brisbane-based beef producer publicly listed on ASX. Its business involves sales and marketing of high-quality branded beef into global markets as well as production of beef including breading, backgrounding, feed lotting and processing of cattle. TBL also owns three large pastoral properties in Queensland.

Its operating profits increased to $45 million from $31 million in the past year, thanks to reduced costs and an increase in meat prices as well as government JobKeeper subsidies.

Market

TBL has a premium branding strategy: its sells Wagyu and Angus beef to top restaurants and consumers around the world. However, this strategy has not been working particularly well since the COVID pandemic. Many top restaurants are shutting down and the remaining ones are struggling to keep their doors open. In addition, trade tensions with China leading to shutdowns of some abattoirs used by TBL in late 2020. As a result, TBLs beef exports to China dropped from 15 % of its total sales in 2020 to 8 % in the 2021 financial year. However, TBL sees stronger demand from North America, where the sales to the North American market increased from 6 % in 2020 to 12% in 2021.

Beef price is currently at a high level globally. Argentina went as far as banning beef exports for 30 days in May 2021 because prices spiked in the South American nation. However, industry insiders predicted meat sales and live cattle sales would drop in the next 12 months.

The trial balance also includes a $64 million increase in the fair value of livestock compared to last year, which TBL suggests is driven by the higher market price in the period.

In the 2021 financial year, the marketing executive, John Fisher, led a successful social media marketing campaign. It involves using 34 social media influencers to help enhance the brand, through reviews on social media. No remuneration is paid to these influencers, but they are provided with free products.

Production

TBL sees a low production level in 2021 financial year. This can be attributable to 1) the lower levels of cattle stock because of drought and flooding in 2019 and 2020; and 2) the companys conscious decision to reduce herd numbers in response to market uncertainties. The production manager also reports a lower than usual calf birth rate in the 2021 financial year, which could affect the fair value of livestock in the coming years [2].

Government JobKeeper Subsidy

To address potential job loss during COVID, the Federal Government provided Australian businesses with JobKeeper wages subsidy until 28 March 2021. TBL received $7 million in Jobkeeper payments from March 2020 to September 2020 but reported an operating profit for both 2021 and 2020 financial years. While other major companies, such as Harvey Norman, repaid their Jobkeeper to the government, TBL refused to return the amount. At press conferences, TBLs CEO, David Lambe, did not want to answer any question related to the subsidies. The engagement partner warned the audit team that any statement from David should be considered with a large pinch of salt.

Executive remuneration

David Lambe was appointed TBLs CEO in 2014 and since then has led a successful campaign to get into the Chinese market. His remuneration has three components: fixed salary, short-term bonus and long-term incentive plan. In 2020 financial year, David and his senior management team received no short-term bonuses in an effort to save operation cost. In 2021 financial year, however, it is expected that the board will approve a bonus 60% of the base salary to the executive team as the company has achieved the $45 million profit target.

Related Party Transactions

Turf N Things, a company owned by David Lambes family trust and directly controlled by him, ordered half a million dollars worth of beef from TBL in May 2021. Further investigation shows that those beef are yet to be delivered by 30 June 2021, but the sales have been booked on 15 June 2021.

Past Misstatements

This is the fifth year KPMJ auditing TBL. While a large percentage of TBLs assets are in livestock and cattle stations, which are subject to fair value assessment and involves judgement and estimates. In the audit of the 2020 financial year, KPMJ found TBLs fair value estimate of livestock was too optimistic and determined the livestock account being materially overstated by $3 million. This misstatement was later adjusted by the client.

[2] It generally takes 32 to 42 months for a new calf to become fully grown and ready for the market.

Tasty Beef Limited Audit Memo on Internal Controls

Prepared by: Dale Smith

Date: 18 June 2021

TBLs internal controls were effective in the past four financial years. In addition to the internal controls identified in the previous audits, we note the following internal control-related events in the 2021 financial year.

TBLs CFO, David Smith, resigned in August 2020 and a few members of the finance team left with him, including the financial controller, Kim Carson. While a new CFO, Michael Booth, was recruited in November 2020 and started immediately, he admitted he is still on a steep learning curve when interviewed by the engagement partner, John Lyon.

From August to November 2020, most staff from the sales team worked from home as a result of COVID lockdowns. While the sales system can be accessed online, the credit manager, John Williams, complained that he was often dropped off the system when giving credit approvals to both new and existing customers.

TBLs employees received several emails impersonating TBL suppliers and asking employees to wire money overseas. While there is nothing new about email scams, with many staff working from home, it is harder to identify some of the scams. As a result, the IT department sent several emails alerting staff about scams.

In February 2021, Debbie Stone, an accountant left the company for alternative employment. Her responsibility at TBL included performing bank reconciliation to identify and account for differences between the bank statement (issued by the bank) and the clients cash account. By 15 June 2021, the company has not found a replacement for her and the bank reconciliation is currently performed by Jenny Jefferey, a first-year accountant already overloaded with work.

In July 2020, TBL purchased facial masks for employees. However, several boxes of the masks were diverted off the back of the delivery truck and become lost.

In September 2020, the senior management team approved extension of credit terms for all customers by 28 days.

The management team get together monthly to conclude a risk assessment process to determine how to address business risks, especially emerging risks related to the market and the supply chain. They also meet if events change rapidly during the pandemic.

In response to the work from home practice, TBL adopted a simplified approval process for purchases in July 2020, where any transaction below $200 do not need formal approval.

QUESTION:

Required:

1. Determine the acceptable audit risk (3 marks)

What is your assessment of the TBLs audit risk? Justify your answer using information in the case. Complete Working Paper Schedule A-1.

Identified factors influencing the auditors judgement of the audit risk: Conclusion:

2. Assessing inherent risk (20 marks)

a) Read the Audit Memo Company Background and identify potential misstatements. Please identify two accounts at risk, justify your answer using relevant information from the case and identify whether the factor increases or decreases the assessed inherent risk. (12 marks) Complete Working Paper Schedule B-1.

[Note: Related accounts are treated as one account. For example, misstatements in purchase and accounts payable are usually caused by the same factors, and no extra marks will be given for identifying the same factor twice for related accounts.]

Accounts at risk

Justification

Impact on inherent risk (Increase or decrease control risk assessment)

b) Calculate the ratios listed in Working Paper Schedule B-2 using values in the trial balance (Excel spreadsheet 2b trial balance) and identify the accounts that are likely to be misstated. (4 marks) Complete Working Paper Schedule B-2.

c) Calculate the expected value of livestock, its difference to the clients reported value of livestock and discuss whether the audit team should perform further investigation on livestock account in the conclusion. Complete Working Paper Schedule B-3. (4 marks)

3. Set materiality at the planning stage (8 marks)

a) Choose an appropriate benchmark to calculate the overall materiality and justify your answer. (2 marks)

b) Identify the qualitative factors that affect your judgement of materiality and explain how they affect your judgement. (4 marks)

c) Choose an appropriate percentage and calculate the overall materiality. (2 marks) Complete Working Paper Schedule M-1

4. Control Risk Assessment (16 marks)

Read the Audit Memo on Internal Controls, please identify events affecting the internal controls of sales, accounts receivable and cash receipts. In your answer, please identify the relevant account(s), and determine whether it increases or decreases the control risk assessment and allows potential misstatements, if any. Complete Working Paper Schedule C-1.

5. Audit Testing (13 marks)

a) Test of controls using analytics (5 marks)

The company policy requires the credit manager, John Williams, to perform credit history checks on all new customers. You obtained a list of new customers processed during the 2021 financial year to identify whether the internal control is effective (see Excel spreadsheet 5a new customer list). Assume the tolerable deviation rate is 6% for the internal control to be considered effective. 1) Identify the relevant audit objective(s) and account(s); 2) calculate the deviation rate for the test of control, 3) in the conclusion section, discuss whether the internal control is effective or not, and evaluate the impact on the substantive procedures. Complete Working Paper D-2.

b) Dollar unit sampling (6 marks)

The auditors decided to use dollar unit sampling to identify the debtors to send confirmation letters to. Please find the list of debtors (see Excel spreadsheet 5b debtor list), sort the debtor list ascending by customer name, apply dollar unit sampling, and complete Working Paper Schedule D-3.

c) Evaluate results (2 marks)

Working Paper Schedule D-4 lists part of the confirmation result. One customer, Tasty Ltd did not respond to auditors positive confirmation request, whereas another customer, Freshy Food Ltds confirmed balance differs from the recorded balance. Design follow-up procedures for the two cases and complete the follow-up procedures in Working Paper Schedule D-4.

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