You are an audit supervisor of Dahlia & Co and are planning the audit of Pengat Sdn Bhd for

the year ending $31$ May $2019.$ The company is a food retailer with a large network of stores

across the country and four warehouses. The company has been a client of your firm for

several years and the forecast profit before tax is RM$28\mathrm{.}9$m$.$ The audit manager has attended

a planning meeting with the finance director and has provided you with the following notes of

the meeting.

Planning meeting notes

Pengat Sdn Bhd has an internal audit $($IA$)$ department which undertakes controls testing

across the network of stores. Each store is visited at least once every $18$ months. The audit

manager has discussed with the finance director that the external audit team may rely on the

controls testing which is undertaken by IA$.$

During the meeting, the finance director provided some forecast financial information. Revenue

for the year is expected to increase by $3\%$ as compared to $2018$ ; the gross margin is expected

to increase from $56\%$ to $60\%$; and the operating margin is predicted to decrease from $21\%$ to

$18\%.$

Pengat Sdn Bhd values inventory in line with industry practice, which is to use selling price

less average profit margin. The directors consider this to be a close approximation to cost$.$

The company does not undertake a full year$-$end inventory count and instead undertakes

monthly perpetual inventory counts, each of which covers one$-$twelfth of all lines in stores and

the warehouses. As part of the interim audit which was completed in January, an audit junior

attended a perpetual inventory count at one of the warehouses and noted that there were a

large number of exceptions where the inventory records showed a higher quantity than the

physical inventory which was present in the warehouse. When discussing these exceptions

with the financial controller, the audit junior was informed that this had been a recurring issue.

During the year, IA performed a review of the non$-$current assets physically present in around

one$-$third of the company$$s stores. A number of assets which had not been fully depreciated

were identified as obsolete by this review.

The company launched a significant TV advertising campaign in January $2019$ in order to

increase revenue. The directors have indicated that at the year end a current asset of

RM$700,000$ will be recognised, as they believe that the advertisements will help to boost future

sales in the next $12$ months. The last advertisement will be shown on TV in early May $2019.$

Pengat Sdn Bhd decided to outsource its payroll function to an external service organisation.

This service organisation handles all elements of the payroll cycle and sends monthly reports

to Pengat Sdn Bhd which detail wages and salaries and statutory obligations. Pengat Sdn Bhd

maintained its own payroll records until $31$ December $2018,$ at which point the records were

transferred to the service organisation.

$2$

Pengat Sdn Bhd is planning to expand the company by opening three new stores during July

$2019$ and in order to finance this, in March $2019$ the company obtained a RM$3$m bank loan.

This is repayable in arrears over five years in quarterly instalments. In preparation for the

expansion, the company is looking to streamline operations in the warehouses and is planning

to make approximately $60$ employees redundant after the year end. No decision has been

made as to when this will be announced, but it is likely to be in May $2019.$

Required:

Describe FIVE $(5)$ audit risks and explain the auditor$$s response to each risk in planning the

audit of Pengat Sdn Bhd$.$