You are the auditor of Britt Ltd, a manufacturer of computer components. The following information was gathered by your audit senior in discussions with management.

Britt exports some of their products to retailers of radios in countries in Eastern Europe such as Russia, Poland and Romania. Unfortunately, due to a recession, many of Britt's customers are buying products in smaller volumes, and some have had trouble paying their accounts on time.

· The management of Britt reacted to this with a number of strategies to boost sales, one of which was to ensure that sales representatives are paid a bonus based on the number of sales they generate for the firm.

· When your audit team performed their ratio analysis, they found that inventory turnover has gone from 5.33 in 2020 to 4.57 in 2021. Also, Inventory represented 17% of sales in 2020, but is now 19% in 2021.

·  The audit senior found that Britt had decided to invest $9 million in Research and Development (R&D), with the aim of designing a laptop computer cooling system that is both 50% more efficient and 30% cheaper to manufacture than systems in current portable devices. This R&D is in a very early phase and the expenditure had been capitalised. In previous years similar R&D expenditure had been treated as an expense.

·   In reviewing liabilities, the audit senior noticed that accounts payable had decreased compared to the prior year. This did not appear reasonable given the level of spending on operating costs and research and development activities. The audit senior approached the financial accountant to seek clarification. In an attempt to reassure the audit senior she said "We have made a concerted effort this year to make prompt payments to all suppliers. We have ensured that trade payables have been reconciled to all supplier invoices and to the payment summary"

 

Required: 

Identify twoaccount areas that are at risk of material misstatement. For each account area identify the key assertion affected and briefly explain why the accounts and assertions are at risk. Identify appropriate audit.