Problem 1

Auditor

You are an audit senior in Planet and Co and you are commencing the planning of the audit of this new client, Sunshine Co, for the year ending 31 August 2020.

Client data

A sandals manufacturer, Sunshine Company in business for 30 years, with a production facility, warehouse and administration offices operating from one central site. Sunshine sells all of its goods to large retail stores, with 60% being to one large chain store Shoetings. Sunshine has a one year contract to be the sole supplier of sandals to Shoetings. It secured the contract through significantly reducing prices and offering a four-month credit period; the companys normal credit period is one month.

Operations

Two years ago Sunshine reduced the level of goods directly manufactured and instead started to import sandals from East Asia; approximately 60% is imported and 40% manufactured. Purchase orders for overseas sandals are made six months in advance and goods can be in transit for up to two months. Sunshine accounts for the inventory when it receives the goods. Within the production facility is a large amount of old plant and equipment that is now redundant and has minimal scrap value.

In 2020 Sunshine has introduced a perpetual inventory counting system to avoid the disruption of a year-end inventory count. The warehouse has been divided into 10 areas and these are each to be counted once over the year. The counting team includes a member of the internal audit department and a warehouse staff member. The following procedures have been adopted.

The team prints the inventory quantities and descriptions from the system and these records are then compared to the inventory physically present.

Any discrepancies in relation to quantities are noted on the inventory sheets, including any items not listed on the sheets but present in the warehouse area.

Any damaged or old items are noted and they are removed from the inventory sheets.

The sheets are then passed to the accounting department for adjustments to be made to the records when the count has finished.

During the counts there will continue to be inventory movements with goods arriving and leaving the warehouse.

At the year-end it is proposed that the inventory will be based on the underlying records. Traditionally, Sunshine has maintained an inventory provision based on 1% of the inventory value, but management feels that as inventory is being reviewed more regularly it no longer needs this provision.

Accountant

In May 2020 Sunshine had a dispute with its accountant and he immediately left the company. The company has temporarily asked the accounting assistant to take over the role while they recruit a permanent replacement. The former accountant has notified Sunshine that he intends to sue for unfair dismissal. The company is not proposing to make any provision or disclosures for this, as they are confident the claim has no merit.

Required:

a) Discuss the importance of assessing risks at the planning stage of an audit. (10 marks)

(b) Identify and explain the audit risks identified at the planning stage of the audit on Sunshine Co. (20 marks)