Question 1

A.You are an audit supervisor of ZIN CPA firm and are planning the audit of Amirfood Sdn. Bhd. for the year ending 31 December 2019. The company is a food retailer with a large network of stores across Malaysia and four warehouses. The company has been a client of ZIN CPA firm for several years and the forecast profit before tax is RM28.9 million. The audit manager has attended a planning meeting with the chief financial officer (CFO) and has provided you with the following notes of the meeting.

Amirfood Sdn Bhd. has an internal audit (IA) department which undertakes controls testing across the network of stores. Each store is visited at least once every 18 months. The audit manager has discussed with the CFO that the external audit team may rely on the controls testing which is undertaken by IA.

During the meeting, the CFO provided some forecast financial information. Revenue for the 2019 is expected to increase by 3% as compared to prior year; the gross margin is expected to increase from 56% to 60%; and the operating margin is predicted to decrease from 21% to 18%.

Amirfood Sdn Bhd. values inventory in line with industry practice, which is to use selling price less average profit margin.

The company does not undertake a full year-end inventory count and instead undertakes monthly perpetual inventory counts, each of which covers one-twelfth of all lines in stores and the warehouses. As part of the interim audit which was completed in January, an audit junior attended a perpetual inventory count at one of the warehouses and noted that there were a large number of exceptions where the inventory records showed a higher quantity than the physical inventory which was present in the warehouse. When discussing these exceptions with the financial controller, the audit junior was informed that this had been a frequent issue.

During the year, IA performed a review of the non-current assets physically present in around one-third of the company's stores. A number of assets which had not been fully depreciated were identified as obsolete by this review.

Amirfood Sdn Bhd. launched a significant TV advertising campaign in January 2019 in order to increase revenue. The directors have indicated that at the year-end a current asset of RM0.7 million will be recognised, as they believe that the advertisements will help to boost future sales in the next 12 months. The last advertisement will be shown on TV in early May 2019.

The company decided to outsource its payroll function to an external service organisation. This service organisation handles all elements of the payroll cycle and sends monthly reports to Amirfood Sdn Bhd. which detail wages and salaries and statutory obligations. Amirfood Sdn Bhd. maintained its own payroll records until 31 December 2018, at which point the records were transferred to the service organisation.

Amirfood Sdn Bhd. is planning to expand the company by opening three new stores during January 2020 and in order to finance this, in October 2019 the company obtained a RM3 million bank loan. This is repayable in arrears over five years in quarterly instalments. In preparation for the expansion, the company is looking to streamline operations in the warehouses and is planning to make approximately 60 employees terminated after the year-end. No decision has been made as to when this will be announced, but it is likely to be in December 2019.

Required:

Describe EIGHT (8) audit risks and explain the auditor's response to each risk in planning the audit of Amirfood Sdn Bhd.

Note: Prepare answer using two columns headed title Audit risk and Auditor's response respectively.