You are the Audit Senior at NicewaterhouseCoopers (NwC) and have been assigned to the audit of Premium Wallets Limited (PML) for the year ending 30th June 2020. PML manufactures and sells wallets for both men and women. PML manufactures all its products at its Malaga factory in Perth and sells via its retail outlet located in Osborne Park. 45% of PMLs sales are to contractors selling fashion accessories in three West Australian cities, namely, Kalgoorlie, Leinster and Margaret River. PML is listed on the Australian Securities Exchange and NwC has been its auditor for several years.

In recent years, PML has been finding it difficult to meet its projected profit forecasts due to increased competition from new local competitors, imported products and online shopping; the increasingly high Australian dollar; and the impact of the COVID-19 induced global economic crisis on consumer spending.

During the planning and risk assessment phase of the audit you become aware of the following matters relating to PML:

1. PML has significant loans from its bank. The bank has indicated that it is concerned about PMLs ability to meet specific loan covenants, particularly the return on total assets (net profit/total assets).

2. Retail customers at Osborne Park pay for merchandise by cash or credit card at cash registers when merchandise is purchased. A contractor may purchase merchandise on account, if approved by the credit manager based only on the managers familiarity with the contractors reputation. After credit is approved, the sales associate files a prenumbered charge form with the accounts receivable supervisor to set up the receivable.

3. The aged trade accounts receivable listing indicates that the percentage of accounts receivable exceeding 90 days has jumped from 15 per cent to 42 per cent during the last 12 months. The credit manager has indicated that this is because some of PMLs customers are currently experiencing financial difficulty.

4. The accounts receivable supervisor independently verifies the pricing and other details on the charge form by reference to a management-authorised price list, corrects any errors, prepares the invoice, and supervises a part-time employee who mails the invoice to the contractor. The accounts receivable supervisor electronically posts the details of the invoice in the accounts receivable subsidiary ledger; simultaneously, the transactions details are transmitted to the bookkeeper. The accounts receivable supervisor also prepares a monthly computer-generated accounts receivable subsidiary ledger without a reconciliation with the accounts receivable control account, and a monthly report of overdue accounts.

5. The bookkeeper receives the details of transactions from the accounts receivable supervisor and the cashier for journalising and positing to the general ledger. After recording the remittance advices received from the cashier, the bookkeeper electronically transmits the remittance information to the accounts receivable supervisor for subsidiary ledger updating. The bookkeeper sends monthly statements to contractors with unpaid balances upon receipt of the monthly report of overdue balances from the accounts receivable supervisor. The bookkeeper authorises the accounts receivable supervisor to write off accounts as uncollectible when six months have passed since the initial overdue notice was sent. At this time, the credit manager is notified by the bookkeeper not to grant additional credit to that contractor.

6. In order to reduce costs, PML changed one of its major suppliers of leather in February 2020 to a cheaper overseas supplier. However, the number of product returns has increased significantly since April 2020, and your discussions with management have indicated that the increased returns have involved customer complaints concerning the quality of the product.

7. Your review of PMLs payroll system has indicated that when an employee is hired or terminated, the payroll clerk immediately prepares the paperwork and enters the information into the master file of the payroll computer system

Required:

Prepare a memorandum to the Audit Manager, outlining your risk assessment relating to PML. When making your risk assessment:

(a) Identify and describe the inherent risk, control risk and fraud risk factors affecting PML.

(b) Identify how the audit plan will be affected for sales/accounts receivables. Recommend specific audit procedures to address the risks identified in the sales/accounts receivables area.

Just describe the key points