Question
You are the auditor-in-charge for the audit of Auto-Pilot Solutions (APS), a Christchurch manufacturer of driver-less vehicle technology. All products are sold directly to customers
You are the auditor-in-charge for the audit of Auto-Pilot Solutions (APS), a Christchurch manufacturer of driver-less vehicle technology. All products are sold directly to customers overseas. The industry is highly competitive and fast-moving due to continual changes in technology. APS was set up 10 years ago but for the last three years has been making only small profits. APS has a bank loan that is contingent on it producing at least break-even results. You have noted the following independent events whilst planning the 31 December 2021 audit: (1) Due to increased competitive pressures, APS has recently moved the manufacture of most of its electronic circuit boards (ECBs) to Thailand. Around 10% of the components for the ECBs are sourced in New Zealand and sent to Thailand to be transformed into finished ECBs. The remaining components are sourced from suppliers in South East Asia. All manufactured output is then returned to New Zealand where they become inputs into the assembly of finished products. APS saves around 30% in costs compared to the equivalent New Zealand-made ECB. However, the manufacturing process takes longer and, on a few occasions, late delivery from Thailand has resulted in lost sales. (2) For most of the financial year, sales staff were paid a salary based on their years of
experience, plus a flat $4,000 bonus each per quarter if quarterly sales targets were met or
exceeded. This system ended on 30 September 2021 and a new scheme was implemented.
Under this new scheme, sales staff are paid a lower salary and sales are tracked by the
individual staff member. If an individual's target is met or exceeded, the salesperson
receives a commission of 5% of their sales.
(3) APS maintains warehouses near major airports in both the North and South Islands of New
Zealand to provide flexibility in exporting goods internationally. Unfortunately, this has
resulted in high warehousing costs due to the duplication of premises and staff. On 1 July
2021, the lease agreements for both warehouses were terminated and the warehouses closed.
All inventory was transferred to a new leased warehouse located in Harewood in
Christchurch, which provides easy access to Christchurch airport. As an inducement for
signing up for the lease, APS is not required to make any lease payments for the first six
months.
REQUIRED:
Based on the information above, identify four potential audit risks that you will need to address
in planning for the audit of APS. For each audit risk identified, state:
(i) why it is a risk to the auditor;
(ii) the financial statement items affected by the risk (if applicable);
(iii) for each financial statement item identified in (ii), ONE financial statement assertion
affected by the risk; and
(iv) ONE example of a specific substantive procedure that would address the audit risk.
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