Case Study 2 You are recently appointed to an Audit Manager position in Bowman & Bowman. This morning, you have received an email from one of the audit partners, Sean Gupta providing you with a number of exhibits concerning Seri Rimba, which he requested you should use in drafting its audit plan for the year-ended 2019. Exhibit 1 - Company Background Seri Rimba was established 20 years ago and specialises in the custom design and manufacture of wooden furniture. Seri Rimba has become known as a leading supplier of wood-based furniture especially, teak-made to customers. Its customer base is located mainly in its country of incorporation, Malaysia and occasionally, received big orders from oversea customers. Most of the components used in Seri Rimba manufacturing process are imported from foreign suppliers, largely from Indonesia. The furniture made by Seri Rimba are mostly made to order in the company's three manufacturing sites. Customer approach Seri Rimba front office to design and develop a furniture or piece of furniture specific to their needs. Where management considers that the design work will be significant, the customer is required to pay 30% payment in advance, which is used to fund the design work. The remaining 70% is paid on delivery of the furniture to the customer. Typically, a set of furniture takes three months to build, and a smaller, separate piece of furniture takes on average six weeks. The design and manufacture of bespoke furniture involving payments in advance has increased during the year. Seri Rimba also manufactures a range of generic products, displayed in its gallery which are offered for sale to all customers. The projected financial statements for the 2019 year-end recognise revenue of RM93 million (2018-RM90 million), profit after tax of RM10.8 (2018-RM10.2) and total assets of RM61 million (2018- RM56 million). Seri Rimba became a public listed firm in its place of incorporation in 2018, and looking to achieve a listing in foreign stock exchange in June 2020. Exhibit 2- Notes from Meeting with Finance Director This year has been successful from a strategic point of view in that Seri Rimba achieved its stock exchange in March 2018, and in doing so raised a significant amount from the external equity financing. All of the company's manufacturing sites will be closed at the year-end to allow for the inventory counts to take place. According to the most recent management accounts, which are available, at 30 November 2019 work in progress is valued at RM8 million (2018- RM5.5 million) and the majority of these orders will not be complete until after the year-end. In recent weeks several customers have returned furniture due to faults, and Seri Rimba offers a warranty to guarantee that defective items will be replaced free of charge. Exhibit 3 - Preliminary analytical review and other financial information Based on Forecasted Data of 31 December 2019 15% Operating margin Inventory holding period Receivable collection period Trade payables payment period Earnings per share Share price b) Provision in returned goods 175 days 90 days Required: Use the information provided in exhibits to prepare briefing notes for a discussion with Sean Gupta prior to audit of Seri Rimba. Your notes should detail, in which you: d) Working capital 60 days 80 cents per share RM3.15 Evaluate the audit risks to be considered in planning the audit of Seri Rimba in matters concerning of: a) Inventory valuation c) Payment in advance and revenue recognition e) Disclosure for listed firms f) Stock listing in foreign market Based on Audited Data Of 31 December 2018 13% 150 days 70 days 55 days [20 marks] [10 marks] [25 marks] [15 marks] [15 marks] [15 marks]