QUESTION 1 (13 MARKS)

Background

Assume you are Chris Mula, the audit manager at RCD Chartered Accountants (RCD) in charge of the financial statement audit of Creative Minds Pty Ltd (CMPL).

CMPL is a toy wholesaler to both retail outlets and educational institutions. Over the last eight years of being an audit client of RCD, HT has grown at a steady pace. However, during the current financial year, sales have doubled, mainly as a result of the market leader in the toy wholesaling industry collapsing amid the global financial crisis (GFC).

As a result of the sudden increase in demand, the following changes have taken place in the business:

Product lines have more than doubled, with CMPL importing the majority of stock for the first time.

Warehousing of stock has been decentralised, with CMPL now operating five warehouses around Australia, rather than the single warehouse it previously maintained near its offices in Melbourne.

CMPL's IT system was replaced during the year. Previously, CMPL operated an off-the shelf package with minor modifications. The new system is a specialised system that was designed and built specifically for CMPL. The new system lets CMPL operate a true e-commerce system, allowing automatic re-order of stock by customers' systems, and fully automated invoicing. The IT system is considered one of the best of its kind in the country and, due to its complexity, came at a large cost to CMPL. Future enhancements would need to be contracted out, as CMPL does not have the skills in-house to alter the system.

As a result of the rapid growth in CMPL's operations, staff numbers have almost doubled in the past year.

You have been allocated the task of planning the audit for the year ending 30 June 2020. From your prior year file review and discussions with CMPL's management, you note the following:

The senior levels of your audit team are very experienced in dealing with CMPL - both the audit partner and yourself have completed the engagement for the last five years.

For each of the years that CMPL has been an audit client of RCD, it has received an unmodified opinion.

Substantial reliance has been placed on the CMPL internal control system for the last two years and in a brief conversation with you in the office hallway, the CMPL audit partner said that he expects that RCD should be able to place substantial reliance on internal controls at CMPL again for this year-end's audit.

Preliminary analytical procedures around accounts receivable balances indicate that CMPL is not collecting its accounts receivable balances in a timely manner; days sales outstanding has increased from 45 days to 59 days year-on-year.

The audit partner views the CMPL audit as a very low risk engagement because of the strong management control and supervision of operations in the business that have historically been exerted by the experienced management team.

During the IT system changeover, the inventory tracking module did not work when the system went live. As a result, manual inventory tracking procedures needed to be used for one month.

Many long-standing employees have left CMPL as a result of changes that they deemed overly complex. None of these resignations was above middle management level.

Required:

(a) Prepare a memo for the audit partner outlining the results of preliminary enquiries and analysis with respect to the planning of the CMPL 2020 year-end audit. (11 marks)

(b) Describe the impact of APES Standards on the planning of your audit. (2 marks)