Question 1 SMIS Recycling PLC (20 marks)

You are a manager working for Anh & Co, a firm of Chartered Certified Accountants specialising in providing professional services to businesses in the resources and materials sectors.

One of the firm's audit clients is SMIS Recycling PLC (SMIS), a listed company specialising in recycling metal and electronics, with operations in over 50 locations around the UK.

You have the following exhibits:

1. Email from audit engagement partner

2. Extract of financial information about SMIS

3. SMIS items of note for 20X1

4. Extract from notes made a team member who recently made a site visit to SMIS.

Required

Respond to the audit engagement partners email, providing her with the required information. (18 marks)

Professional marks will be awarded for the presentation and logical flow of the email response and the clarity of the explanations provided. (2 marks)

Exhibit 1 Email from audit engagement partner

From: auditpartner@anhco.co.uk

To: auditmanager@anhco.co.uk

Subject: SMIS Recycling PLC (SMIS)

Hello,

I need you to draw up some preliminary information for the SMIS audit for the year ended 31 December 20X1 please. Using the information provided in the attached exhibits, I require the following:

(a) Evaluate the significant audit risks to be considered as part of planning the SMIS audit. (8 marks)

(b) For each of the audit risks you identify in (a), outline the effect that it will have on the audit plan for the year ended 31 December 20X1. (6 marks)

(c) Briefly outline how the audit team might make use of analytical procedures in the SMIS audit for the year ended 31 December 20X1, and discuss any issues associated with using analytical procedures arising in that year. (4 marks)

You do not need to address any engagement or self-review issues for this piece of work.

Thank you.

Exhibit 2 Extract of financial information about SMIS

In June 20X1, SMIS completed a share restructure in which 30,000 Ordinary A 50c shares were bought back by the company and exchanged for 15,000 ordinary $1 shares. A further 50,000 $1 ordinary shares were sold on the stock exchange for $10 per share. The new issue was fully subscribed.

SMIS results show an increase on the previous year. Revenue is $21,151,611 (20X0: $18,150,210) and profit before tax is $1,721,042 (20X0: $745,000). The cash raised by the share restructure enabled the company to pay off some long-term debts and still reflect an improvement in its cash-in-hand figure.

Exhibit 3 SMIS items of note for 20X1

In January 20X1, SMIS expanded its operations to the Malaysia by acquiring a majority of shares in an electronics recycling company. A material amount of goodwill was capitalised at the time of purchase. No immediate efforts were made to integrate IT systems of the Malaysian operations with the London head office immediately after the purchase.

There have been significant fluctuations in foreign exchange rates during the year and the Malaysian operations have achieved poor financial performance since the acquisition.

SMIS has contracts with various suppliers to purchase fixed quantities of scrap metals at the end of each month at the prevailing market price. Following a change to its payables processes, SMIS implemented a system of prepaying for their contracted purchases in the middle of the month and making any adjustments required due to variations in market price following the end of the month once supplier invoices are received. While market prices for scrap metal have been relatively stable, the advanced payments figure ($757,235) in the company's financial statements is notably larger than the previous years figure (20X0: $357,221).

SMIS has revalued its headquarters office property in 20X1. The revaluation was completed by the company's Financial Controller, Wilma Horiz. The property value of $10.5 million (20X0: $8.2 million) has been calculated despite the current property market reporting similar buildings in the same area falling in value by around 15% over the last 12 months.

Exhibit 4 Extract from notes from site visit to SMIS

There were limited physical controls over inventory. We were able to access storage warehouses in a number of locations simply be identifying ourselves as the external auditor. We were not asked for any identification, and our visits were not supervised in any way.