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 RM28.9m. 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 reviewed the non-current assets physically present in around one-third of the companys 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 RM700,000 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 details 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.

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 RM3m 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 EIGHT audit risks and explain the auditors response to each risk in planning the audit of Pengat Sdn Bhd.

[1 Audit Risk = 2 marks + Explanation = 3 marks X 8 = 40 marks]