Issue:

The ASX company Bijou Electronics have reported sales problems over the last few years. Reduction in costing has been difficult due to Covid and the significant levels of imported inventory. All margins have reduced as a result. During this reporting period warranty claims on their strongest performing inventory item, the premium car battery tester, have been increasing. This has resulted in an increase from 7% of sales to 12% of sales. The problem relates to the copper wiring in the handheld tester which overheats and can spark up causing flames. The average cost to repair has risen by over 50% to $300 per warranty. The CEO of the company (your friend whom you went to university with) assured you they are not worried by this cost since each product retails for $2,999. The lenders are still willing to provide loan financing to Bijou as they expect better results next year in a post-Covid world and also this particular company pays a much higher interest rate than their other clients.

Requirements

Assume you are the audit manager preparing your audit plan:

1)Describe the factors would you consider when allocating staff to the audit? (5 marks)

2)Discuss the audit risks that need to be considered:

i)At the planning stage (5 marks)

ii)During the audit (3 marks)

iii)After the sign-off of the audit report (2 marks)

3)Identify the main account or groups of accounts that could be impacted and give reasons (5 marks)

4)Design effective audit procedures that would be included in the audit plan (10 marks)