SCENARIO 1

You are a senior audit in-charge of M/S AS associates audit organization. The audit manager instructed you to prepare an audit plan to start the audit for a public quoted company Orange Plc for the year ended 31st December 2020 the manufacture of electrical appliances for the building construction industry such as switches, plugs, cables etc. As per the unaudited draft financial statements the profit after tax was RO 35.5 million.

The senior in-charge attended the initial meeting with the directors of the Orange Plc and noted down the following points to plan and take appropriate action to go ahead with the audit.

One of the Orange Plc subsidiary company is Smart Builders LLC. On 25th December 2020, the orange Plc CEO is also a director of Smart Builders LLC entered into a contract with Smart Builders LLC to supply building electrical accessories for an unusual price below the market price for a value of RO 350 million. The Orange Plc CEO justified that this transaction would build up a strong business relationship between the two companies.

It has been noted based on the preliminary analytical procedure that the gearing ratio has increased sharply from 55% to 85% from 2019 to 2020. The directors have given couple of reason stating that the Orange Plc has issued bonds with attractive interest rate to start a new project on manufacturing temperature checking equipment to be installed in commercial building which cannot be visible. This project is expected to be commenced mid-September 2021. The loan sanctioned in early October 2020.

The directors have commented that the inventory control system which was maintained in manual has been computerized in the mid of the year to improve the accuracy of inventory to serve the customers better. The cost incurred to the change was RO 21 million. The store manager worked for the Orange Plc for the last 20 years and planning to retire in 3 years time. No additional staff has been appointed to keep the cost down by the Orange Plc since the initial cost to change over is substantially high.

The receivables have increased by two times when compare to the year 2019 in year 2020. Orange Plc has given a longer credit period of 45 days when compare to the 30 days in 2019. It has been noted that few of the customers of Orange Plc were facing financial difficulties due to COVID-19.

Due to the current COVID-19 pandemic, the number of staff in the production flow has been redundant in early 2020. Some of the long-standing experience production staff have been removed after paying an attractive redundancy. It has been noted that those experience staff join the competitor companies to Orange Plc.

Orange Plc decided to outsource its payroll function to an external service Organisation. This service organization handles all elements of the payroll cycle and sends monthly reports to the finance director, which details wages and salaries and statutory obligations. Orange Plc maintained its own payroll records until 31st December 2019, at which point the records were transferred to the service organization. The service organization directly contacts the Finance director Mr. Thomas and takes advices to transfer payments and fixing the salaries. There are no clear-cut policies within the company.

A directors bonus scheme was introduced during the year which is based on achieving a target profit before tax. To finalize the bonus figures, the finance director of Orange would like the audit to commence earlier so that the results are available earlier this year.

Task 2

Examine the test of Controls and steps to be taken by M/S AS Associates to employ internal control procedures.