You have recently been appointed as senior-in-charge of the audit of SignsCo, a subsidiary of BillsCo. The company must be externally audited. The company produces a wide selection of signs and signboards, ranging from small signs used on doors to large freestanding road signs. Traffic and road signs form the major portion of the companys sales. SignsCo only supplies signs; it does not attach or erect them.

Your firm has held the appointment of auditor for some years but you have not worked on the audit before. Early in April your audit manager forwarded a letter to you from the external auditors of BillsCo which indicated that they required the audit pack, consisting of the audited financial statements, various schedules and questionnaires for the 30 June 2019 financial year end audit of SignsCo, to be in their offices by 15 July 2019. This development has taken your firm by surprise as in prior years no such instruction has been given. No work on the 2019 audit has taken place.

Your audit manager also attached a note to the letter suggesting that you get started on the engagement immediately by attending the monthly meeting between the financial controller and the internal audit manager of SignsCo, which was scheduled for the next day. You arranged to attend, and despite your lack of knowledge of SignsCo, you were able to take note of the following:

1. The companys year-end inventory count has been scheduled for 30 June 2019. Inventory consists of raw materials, WIP (manufacturing is quite complex as various weather coatings on outside signs must be applied and heat treated), finished goods in the form of standards signs, and custom-made signs for specific customers awaiting invoicing and delivery. Inventory is held at all of the companys four manufacturing facilities.
2. The company has numerous debtors, and accounts receivable has always been a material amount. The financial controller mentioned that the company was experiencing difficulty in recovering a number of material amounts owed by road authorities. This has arisen out of disputes over road signs which SignsCo has manufactured and invoiced, but which bear the names of towns and streets which have had their names changed during, or subsequent to, the manufacture of the signs. SignCo argued they manufactured the signs per the order. The financial controller indicated that the failure to recover the amounts owed has placed serious strain on the cash flow, and could affect future dealings with these customers. SignsCo lawyers are undecided about what the outcome of the court case would be, other than it would be long and drawn out.
3. As a matter of course, SignsCos internal auditors perform ongoing reviews and test of controls on the companys accounting systems. They also evaluate the companys risk assessment procedures and its responses thereto.

Having attended the meeting, you decided to commence with planning your audit right away as suggested by your audit manager.

REQUIRED:

1. Explain why it is so important for the auditor to obtain a thorough understanding of the entity and

its environment.

2. Discuss the procedures you will conduct to identify and assess the risk of material misstatement

through understanding SignsCo and its environment.

3. Discuss, giving reasons, your assessment of the risk of material misstatement in respect of the

30 June 2019 audit of SignsCo, based on the information given in the question.