Ex$14.$ Question MICHENER CO

This scenario relates to two requirements.

It is $1$ July $20$X$5.$ You are the manager in charge of the audit of Michener Co$,$ a company that

imports clothes from overseas for retail through its chain of shops in Europe. The company's year

ended $30$ June $20$X$5.$ Draft financial statements show total assets of $$325m.$

Clothes are ordered each month from the overseas supplier. Orders take two weeks to arrive at

Michener Co's European distribution centre, The clothes are then sent to each of its shops. In the

supplier agreement, the clothes become the inventory of Michener Co on despatch from the

supplier.

During the year, Michener Co purchased a new warehouse as its distribution centre. The old

warehouse remains in the non$-$current asset register although it is no longer used. The directors are

considering retaining the warehouse to store excess inventory that is no longer in fashion, but no

decision has yet been made. Current excess inventory is stored in shops and sold with significant

price reductions three times each year.

Revenue in March $20$X$5$ was very high due to sales promotions and discounts offered to customers.

The directors of Michener Co have already been paid an annual bonus on the basis of this and

assuming that sales will continue as budgeted for the remaining three months of the year. The

bonus is included in salaries in the management accounts. Local legislation requires separate

disclosure of directors' salaries and bonuses in the financial statements.

During the year, the directors of Michener Co received notice of a legal case against the company.

Many customers are complaining that blue dye from a popular brand of Michener Co's trousers

has caused skin irritation. More than $100$ customers have made complaints to date. The trousers

are still on sale in shops that have not received any complaints.

The purchase of the new warehouse was financed with a loan that is repayable in ten equal annual

instalments.

Requirements:

$($a$)$ Describe EIGHT audit risks and explain the auditor's response to each risk in planning the

audit of Michener Co$.(16$ marks$)$

It is now $1$ October $20$X$5.$ The directors of Michener Co have still not decided on any action

regarding the disused warehouse. The auditor's expert has concluded that the warehouse is

overvalued by $$10m.$ The chair has referred to the possible new use of the warehouse in his

statement for the annual report stating that the value of the warehouse is therefore more than

its carrying amount in the statement of financial position.

$($b$)$ Describe the impact on the auditor's report if the issue remains unresolved $(4$ marks$)$