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[Type the document title] Case Study 2 YOUR CLIENT, GM LTD, is in the brewery business, and operates brewery and bottling plants in various locations around the world. Each country has a Regional Processing Centre (RPC), which acts as the accounting and administrative centre for that country. Each country prepares financial data and summarises the information into a package format. This package is submitted to head office in Perth on a monthly basis. Material balance sheet items consist of inventories, accounts receivable, accounts payable, brand names and property, plant and equipment. It is February 2015, you are currently planning the June 2015 audit and have the following information. Each situation is to be considered independently: 1. Civil unrest in Country X makes it impossible for branch auditors to visit the RPC to carry out audit procedures on your behalf. Due to a communications blackout, you are unable to ascertain whether the RPC is still functional. Country X contributes approximately 8% of GM's turnover. 2. In past years head office has maintained tight control over the operations of GM LTD. However, in keeping with current Total Quality Management principles, many functions formerly performed at head office are now performed by each RPC. Management has expressed some concern at the quality of the monthly reporting packages which it has been receiving, particularly those from the South Pacific region. 3. In order to maintain a steady supply of quality wheat to the Australian breweries, GM LTD has entered into a three-year contract with the Australian Wheat Board (AWB). This contract provides in part: 'GM LTD guarantees to purchase the AWB's entire stock of Grade A wheat over the period of the contract. The price paid will be market rate less 10%.' 'Should the supply of Grade A wheat fall below GM LTD's requirements. GM LTD can purchase wheat to the amount of the shortfall from other sources.' [Type the document title] 4. Brand X beer comprises 30% of total revenues. A recent Brand X beer tasting festival in Europe ended with hundreds of people being taken to hospital with severe stomach cramps. The problem is believed to relate to contamination of the secret ingredient used in the beer. This ingredient is produced centrally in Sydney and distributed to all the breweries for use in their manufacturing operations. 5. New environmental laws introduced in Australia during the year have imposed the following statutory accounting regulations on the Australian operations of GM LTD: The 'cost' of waste discharges into waterways must be charged as an expense, to reflect the reduced quality of the water post-discharge. The 'value' of any waterways situated on company property must be taken up as an asset. The waterways must be amortised as detailed above. The value of the waterways will not be allowed to fall below 70% of their original value. REQUIRED Assume you are responsible for the preparation of an audit plan in each of the situations discussed above. In each case describe how the situation posed would affect your audit plan. Include reference to the nature and/or extent of audit evidence to be collected. Issue Affect your audit plan. Include reference to the nature and/or extent of audit evidence to be collected 1. (Example solution) Country X contributes about 8% to profits. This falls between the 5-10% materiality guidelines and cannot be ignored. It is February 2015. Perhaps there were audited figures for the Try to contact Country X, its government and the branch auditors to determine if the RPC is still functional. Obtain details from BZ Ltd. on how they will be estimating Country X's results for 2015. The following items are of particular interest: 1 Inventories and property, plant and equipment may have been destroyed and may have no value. 2 Debtors may not pay in such circumstances. 3 Insurance policies are likely to be worthless when there [Type the document title] December half year which could be used. There are still four months until year end. The auditors must plan to use any information the client can provide, verify this data and place more audit emphasis on other regions. is civil unrest. 4 Compensation may be paid by Country X's government if BZ has suffered any losses. 5 The exchange rate may be erratic. 6 What impact Country X's operations have on the company - not only directly through their 8% contribution but also perhaps as a link with other segments. 7 How BZ will disclose this problem in their annual report. 8 A review of board meeting minutes to understand how BZ has reacted to this problem and how they intend to respond in the future, (i.e., rebuild or abandon operations in Country X)