Q2.B)

You are an audit manager of Earl & Co and are planning the audit of Darjeeling Co for the year ending 30 September 2020. The company develops and manufactures specialist paint products and has been a client of your firm for several years.

During the year Darjeeling Co has spent $09m, which is included within intangible assets, on the development of new product lines, some of which are in the early stages of their development cycle. Additionally, as the company is looking to expand production, during the year it purchased and installed a new manufacturing line. All costs, incurred in the purchase and installation of that asset, have been included within property, plant and equipment.

In order to finance the development projects and the new manufacturing line, the company issued $4m of irredeemable preference shares. Developing new products and expanding production is important as the company intends to undertake a stock exchange listing in the next 12 months.

The company started a number of initiatives during the year in order to boost revenue. It offered extended credit terms to its customers on the condition that their sales order quantities were increased. In addition, Darjeeling Co made an announcement in October 2019 of its price promise: that it would match the prices of any competitor for similar products purchased. Customers who are able to prove that they could purchase the products cheaper elsewhere are asked to claim the difference from Darjeeling Co, within one month of the date of purchase of goods, via its website.

The finance director informed the audit manager that a problem arose in June 2020 in relation to the mixing of materials within the production process for one particular product line. A number of these faulty paint products had already been sold and the issue was identified following a number of complaints from customers about the paint consistency being incorrect. As a precaution, further sales have been stopped and a product recall has been initiated for any of these specific paint products sold since June.

Requirement: Using the information provided, describe Five audit risks and explain the auditors response to each risk in planning the audit of Darjeeling Co. Note: Prepare your answer using three columns headed The Issue, Audit risk and Auditors response respectively.