You are an Audit Senior currently planning the $30$ June $2023$ audit of Melodic Sounds

Limited $($MSL$).$ MSL manufactures mini hi$-$fi systems. The company has a year$-$end of

$30$ June $2023.$ In December $2022,$ MSL changed its manufacturing process to make its

product more reliable. Because of this increased reliability, the company decided to

increase the warranty on its products from $3$ years to $5$ years in relation to all sales made

from $1$ January $2023.$ From management$$s review of warranty claims relating to the

new products, it was noted that claims were down by about $20\%$ compared with the old

product. Management made an estimate of the provision for warranty of $$4000000$ for

$30$ June $2023,$ up from $$3500000$ for the previous year. You are aware that MSL made

a large investment for the new manufacturing process in December $2022$ to place itself

in a more competitive position. Your analytical procedures indicate a significant

increase in acquisitions of machinery.

$60\%$ of the suppliers from which MSL sources components and parts to manufacture its

mini hi$-$fi systems are owned by US firms, which demand payment in $US prior to the

parts being supplied. In January, MSL upgraded its accounts payable system to a fully

integrated package that automatically updates the general ledger when creditor entries

are made. Some problems have been experienced with the creditors ledger, which is

split into $US and $AUD amounts. In some cases, $US amounts have been recorded as

$AUD, resulting in inaccurate creditor balances. Month$-$end rollovers have also proved

problematic, with creditor balances being incorrectly re$-$set to zero at the first of every

month. This has required each creditor$$s history to be re$-$entered manually each month,

a time$-$consuming process that is taking accounting staff away from their normal duties.

The human resources department at MSL is responsible for selecting and appointing

employees, approving pay rates and promotions, and processing employee terminations.

The payroll department is responsible for preparing the weekly wages based on the

information from the human resources department and according to hours worked by

each employee. MSL has several long$-$term contracts to deliver goods throughout

Australia. The company operates a fleet of large trucks and has several permanent

drivers who are assisted by other drivers on short$-$term contracts during busy times of

the year $($such as the three months prior to Christmas$).$ Drivers work long shifts and

most of the driving is done at night.

During busy times the human resources department falls behind with processing

paperwork related to short$-$term contract drivers. There are constant complaints from

the drivers that they must wait several weeks after they start work for their first pay.

When testing the payroll process you discover that the complaints from the drivers are

justified; it takes on average three weeks from the date the driver starts work for the

relevant authorization for the driver$$s pay to be received by the payroll department.

However, you also find that on average drivers are paid one additional week after they

leave the company because the human resources department does not record the

termination date accurately. The payroll department tells you that, because of the

confusion, no provision is made for accrued wages at year$-$end.

MSL exports hi$-$fi systems to China. Tight checks by Australian custom officials have

delayed several shipments of these systems. These delays have angered Chinese

customers who are threatening to deduct $45\%$ from the amounts owing as compensation

for lost time. MSL$$s main competitor, Megha Audio Limited $($MAL$)$ has taken

advantage of this and started supplying mini hi$-$fi systems to the Chinese market from

its New Zealand branch for quicker deliveries and at prices lower than those offered by

MSL$.$

During the period, the Australian dollar has remained steady against the Chinese Yuan,

although it fell by about $5\%$ against the US dollar. Debtors are invoiced in $US at the

time of shipment, and payment is received in $US one month after the shipment is

delivered. It takes around four weeks for the charter vessels to travel from MSL$$s

shipyard at Westmantle Bay to China. A recent downturn in the Chinese economy is

affecting forward orders, which have fallen by $15\%.$

Required:

Prepare a memorandum to the audit manager, outlining your risk assessment relating to

Melodic Sounds Limited $($MSL$).$ When making your risk assessment:

$($a$)$ Identify four $(4)$ key account balances from the information provided that are

subjected to an increase in audit risk. Briefly explain what factors increase the

audit risk associated with the four $(4)$ accounts identified. In your explanation,

please mention the key assertion$($s$)$ at risk of material misstatement for each

account identified.

$($b$)$ Identify how the audit plan will be affected and recommend specific audit

procedures to address the risks associa