You are an Audit Senior currently planning the 30 June 20X1 audit of Australian Timber Limited (ATL). ATL operates a timber sawmill in Wilga, Western Australia. ATL obtains its raw materials from a number of local growers and its own plantations. Logs are transported on large trucks that are weighed in on the company’s weighbridge and weighed out after dropping their loads in the storage area. Logs are then debarked and sawn to size in the cutting area of the mill. The various logs are then sent to other areas of the sawmill depending on what they will be used for. During the planning stage of the audit, you perform analytical procedures. You discover that the average number of days taken by ATL to pay its creditors has declined significantly from the average recorded over the past three financial years. 

Your investigation reveals that log suppliers represent more than 90 percent of the value of accounts payable. As an internal control, details of the goods received notes are matched against the supplier’s invoice. The accuracy of the invoice is checked, after which the invoice is authorised for payment by the mill accountant. Any discrepancy between what the supplier’s invoice amounts should be and the actual amount charged by the supplier is communicated to the supplier by way of a pre-numbered ‘request for credit’ form. This form provides reasons for the differences and the amount requested to be credited to the company by the supplier. The correct amount of the invoice is entered into the accounts payable accounting system and the supplier’s monthly statement is reconciled to the accounts payable balance per the creditors’ ledger at month end. 

The differences are mostly attributable to unprocessed invoices due to pricing differences, timing differences in the recorded date of a payment made, amounts requested for credit, and settlement discounts allowed. Michelle Gellar, the company’s financial controller, informs you that due to the increase in the price of timber, new contracts with suppliers have been negotiated over the past year. The accounts payable personnel have complained that management is too slow in informing them about the effective dates of the implementation of the contracts and the revised prices. A brief inspection of the accounts payable reconciliations for five of the biggest suppliers indicates that many invoices are being held back due to the lack of correct pricing. ATL maintains details of stock quantities on its computer and these stock quantities are updated from goods received notes and sales invoices. ATL conducts a ‘wall-to-wall’ count of its inventory when all operations cease, and all inventory is counted in a single stocktake. The bulk of inventory is held in two adjoining warehouses owned by ATL. 

However, a material amount of timber inventory is held in a separate warehouse in a different suburb by a third party. During the audit planning stage of the audit, you have discovered the following:  Some empty containers may have been included in the inventory count due to poor labelling procedures.  The lower of cost or net realisable value method may have been incorrectly applied. ATL has been the biggest exporter of the Jarrah (Eucalyptus Marginata) and Marri (Corymbia Calophylla) timber species to China. Border restrictions, stricter checks by Australian custom officials, and recent trade disputes between Australia and China have delayed several shipments of timber. These delays have angered Chinese customers who are threatening to deduct 30% from the amounts owing as compensation for lost production time. 

These customers are also threatening to not purchase any Jarrah or Marri from ATL in the near future and instead expand imports of kauri Timber from New Zealand. Two of ATL’s major customers in China, Sino-Timber and Hong Timber, are claiming that the latest batch of timber supplies they received were infested with woodworm. Both the companies claim the infestation to be so serious that no treatment has seemed to work. This infestation has made the timber useless. Sino-Timber and Hong Timber are refusing to pay their accounts, which are already six months overdue. ATL has launched an investigation into the allegations, but as yet has not been able to substantiate them. During the period, the Australian dollar has remained steady against the Chinese Yuan, although it fell by about 3% against the US dollar. 

Chine customers 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 ATL’s shipyard at Bluedock Bay to China. Recent trade disputes between Australia and China are affecting forward orders, which have fallen by 45%. Required: Prepare a memorandum to the audit manager, outlining your risk assessment relating to Australian Timber Limited (ATL). When making your risk assessment:

(a) Identify three (3) 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 three (3) 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 associated with each account identified.