Question 2

a) Apricot is an information technology (IT) manufacturing company which has been dealing in various IT equipment over 70 years. It operates from one central site which includes the production facility, warehouse and administration offices.

You are an audit senior in Juit Company, and you are commencing the audit planning of Apricot Company for the year ending 31 April 2019.

Apricot Company sells all of it IT equipment to multinational clients, with 75% being sold to a multi-million IT dealer. The company has a one-year contract to be the sole supplier of IT equipment. In order to secure the contract, the company reduced prices and offered 100 days credit period, while its normal credit period is 28 days, which is an equivalent of month.

Currently, Apricot Company has strategically reduced the level of products directly manufactured and rather started to import significant amount of its IT equipment from India. Nearly 65% of the IT equipment is imported and 35% manufactured. Purchase orders for imports are made five months in advance and goods can be in transit for up to three months. Apricot Company accounts for the inventory when it receives the goods.

An assessment show that Apricot Company has an equipment manufacturing plant which is now redundant and also assessed to have minimal scrap value.

To avoid the disruption of a year-end inventory count, Apricot Company has this year introduced a continuous inventory counting system. Apricot Company divided the warehouse into 12 areas, and each of these are to be counted once within the year. At the year-end, it is proposed that the inventory will be based on the underlining records. Traditionally, Apricot Company has maintained an inventory allowance based on 2% of the inventory value, but management feels that as inventory is being reviewed more regularly, it no longer needs this allowance.

In January 2019 Apricot Company had a dispute with its finance director (FD) and he was forced to immediately leave the firm. In his place, the company has asked the financial controller to take over the role temporarily, while they recruit a permanent replacement. The old FD has notified Apricot that he has intentions of suing for unfair dismissal. The company is not proposing to make any provision or disclosure for this, as they are confident the claim has no merit.

You are required to:

Explain the audit risks identified at the planning stage of the audit of Apricot Company. 4 marks

Discuss the importance of assessing risks at the planning stage of an audit. 3 marks

Describe THREE substantive procedures the auditor of Apricot Company