Q4) You are the audit manager of Saqib Shaukat and Company, Chartered Accountants, responsible for the audit of Modern Electronics Limited (MEL) for the year ended 31 May 2018. MEL is a listed company and is engaged in manufacture of wearable sports sensors, smart watches, GPS navigation systems, vehicle cameras and fleet management system, and sells it through a chain of distributors throughout the country. The extracts of segment information as disclosed in the draft financial statements for the year ended 31 May 2018 is as follows: Wearable sports GPS Navigation sensor All other segments Total 2018 2017 |2018 2017 2018 2017 2018 2017 Rs. In Millions Revenue 6,3237,978 4,119 5,319 3,480 2,346 13,922 15,643 Cgs (3,800)|(5,158) (3,234) (4.149) (2.749) (1,643) (9.813) (10.950) Gross profit 2,493 2.820 885 1,170 731 703 4,109 4.693 Net profit 1,141 1,244 257 351 133 282 1.531 1.877 Fixed Assets 1,980 Debtors 633 Inventory 640 2,329 685 665 2,395 361 378 2.661 488 444 2,777 334 294 1,662 196 196 7,152 6,652 1,328 1,369 1,312 1,305 The following information is also available: 1. MEL was witnessing a shift of customers from wearable sports sensors to smart watches which have additional features as compared to the features being offered by wearable sports sensors. Therefore, to maintain its customer base MEL started developing its own smart watch and successfully launched it in 2018. MEL intends to expand its product range in the smart watch segment by expanding its manufacturing facility which would be financed through a right issue. 2. On 10 April 2018 MEL publicly announced that it was closing an old (fully depreciated) plant which was used to manufacture a component used in the wearable sports sensors and will instead import it from China at cheaper rates. The management is considering various options in respect of this plant. However, the affected employees were communicated about the decision on the same date and negotiations with the labour union were started for agreeing on the termination payments. 3. A significant portion of the sale of GPS navigation system consists of sale to the tourism industry. The government had made it mandatory for all tour operators to install GPS navigation system. The compliance has to be made by all tour operators over a period of four years. Association representing the country's tour operators had signed a four-year agreement in April 2016 with MEL under which discounted sale price has been offered to the tour operators which cannot be raised. A natural disaster destroyed the supplier's plant which supplied several components of the GPS navigation system and consequently MEL has to import these components from Malaysia at twice the cost of local purchase. At the year-end 200 contracts for supply of 4,000 GPS navigation systems are still pending. Required: Identify the audit risks in the above situation and specify the key audit steps which you will perform in respect thereof. Q4) You are the audit manager of Saqib Shaukat and Company, Chartered Accountants, responsible for the audit of Modern Electronics Limited (MEL) for the year ended 31 May 2018. MEL is a listed company and is engaged in manufacture of wearable sports sensors, smart watches, GPS navigation systems, vehicle cameras and fleet management system, and sells it through a chain of distributors throughout the country. The extracts of segment information as disclosed in the draft financial statements for the year ended 31 May 2018 is as follows: Wearable sports GPS Navigation sensor All other segments Total 2018 2017 |2018 2017 2018 2017 2018 2017 Rs. In Millions Revenue 6,3237,978 4,119 5,319 3,480 2,346 13,922 15,643 Cgs (3,800)|(5,158) (3,234) (4.149) (2.749) (1,643) (9.813) (10.950) Gross profit 2,493 2.820 885 1,170 731 703 4,109 4.693 Net profit 1,141 1,244 257 351 133 282 1.531 1.877 Fixed Assets 1,980 Debtors 633 Inventory 640 2,329 685 665 2,395 361 378 2.661 488 444 2,777 334 294 1,662 196 196 7,152 6,652 1,328 1,369 1,312 1,305 The following information is also available: 1. MEL was witnessing a shift of customers from wearable sports sensors to smart watches which have additional features as compared to the features being offered by wearable sports sensors. Therefore, to maintain its customer base MEL started developing its own smart watch and successfully launched it in 2018. MEL intends to expand its product range in the smart watch segment by expanding its manufacturing facility which would be financed through a right issue. 2. On 10 April 2018 MEL publicly announced that it was closing an old (fully depreciated) plant which was used to manufacture a component used in the wearable sports sensors and will instead import it from China at cheaper rates. The management is considering various options in respect of this plant. However, the affected employees were communicated about the decision on the same date and negotiations with the labour union were started for agreeing on the termination payments. 3. A significant portion of the sale of GPS navigation system consists of sale to the tourism industry. The government had made it mandatory for all tour operators to install GPS navigation system. The compliance has to be made by all tour operators over a period of four years. Association representing the country's tour operators had signed a four-year agreement in April 2016 with MEL under which discounted sale price has been offered to the tour operators which cannot be raised. A natural disaster destroyed the supplier's plant which supplied several components of the GPS navigation system and consequently MEL has to import these components from Malaysia at twice the cost of local purchase. At the year-end 200 contracts for supply of 4,000 GPS navigation systems are still pending. Required: Identify the audit risks in the above situation and specify the key audit steps which you will perform in respect thereof