YOUR CLIENT, GM LTD, is in the brewery business, and operates brewery and bottling plants

in various locations around the world. Each country has a Regional Processing Centre (RPC),

which acts as the accounting and administrative centre for that country. Each country

prepares financial data and summarises the information into a package format. This package

is submitted to head office in Perth on a monthly basis. Material balance sheet items consist

of inventories, accounts receivable, accounts payable, brand names and property, plant and

equipment. It is February 2015, you are currently planning the June 2015 audit and have the

following information. Each situation is to be considered independently: 1. Civil unrest in Country X makes it impossible for branch auditors to visit the RPC to

carry out audit procedures on your behalf. Due to a communications blackout, you

are unable to ascertain whether the RPC is still functional. Country X contributes

approximately 8% of GMs turnover.

2. In past years head office has maintained tight control over the operations of GM LTD.

However, in keeping with current Total Quality Management principles, many

functions formerly performed at head office are now performed by each RPC.

Management has expressed some concern at the quality of the monthly reporting

packages which it has been receiving, particularly those from the South Pacific

region. 3. In order to maintain a steady supply of quality wheat to the Australian breweries,

GM LTD has entered into a three-year contract with the Australian Wheat Board

(AWB). This contract provides in part:

GM LTD guarantees to purchase the AWBs entire stock of Grade A wheat

over the period of the contract. The price paid will be market rate less 10%.

Should the supply of Grade A wheat fall below GM LTDs requirements. GM

LTD can purchase wheat to the amount of the shortfall from other sources. [Type the document title] 4. Brand X beer comprises 30% of total revenues. A recent Brand X beer tasting festival

in Europe ended with hundreds of people being taken to hospital with severe

stomach cramps. The problem is believed to relate to contamination of the secret

ingredient used in the beer. This ingredient is produced centrally in Sydney and

distributed to all the breweries for use in their manufacturing operations. 5. New environmental laws introduced in Australia during the year have imposed the

following statutory accounting regulations on the Australian operations of GM LTD:

The cost of waste discharges into waterways must be charged as an

expense, to reflect the reduced quality of the water post-discharge.

The value of any waterways situated on company property must be taken

up as an asset. The waterways must be amortised as detailed above. The

value of the waterways will not be allowed to fall below 70% of their original

value.

REQUIRED

Assume you are responsible for the preparation of an audit plan in each of the situations

discussed above. In each case describe how the situation posed would affect your audit

plan. Include reference to the nature and/or extent of audit evidence to be collected. Issue Affect your audit plan. Include reference to the nature and/or

extent of audit evidence to be collected 1.

(Example solution)

Country X contributes

about 8% to profits.

This falls between the

510% materiality

guidelines and cannot

be

ignored.

It is February 2015.

Perhaps there were

audited figures for the Try to contact Country X, its government and the branch

auditors to determine if the RPC is still functional.

Obtain details from BZ Ltd. on how they will be

estimating Country Xs results for 2015. The following

items

are of particular interest:

1 Inventories and property, plant and equipment may

have been destroyed and may have no value.

2 Debtors may not pay in such circumstances.

3 Insurance policies are likely to be worthless when there [Type the document title]

December half year

which could be used.

There

are still four months

until year end. The

auditors must plan to

use any information

the client can provide,

verify

this data and place

more audit emphasis

on other regions. is civil unrest.

4 Compensation may be paid by Country Xs government

if BZ has suffered any losses.

5 The exchange rate may be erratic.

6 What impact Country Xs operations have on the

company - not only directly through their 8%

contribution

but also perhaps as a link with other segments.

7 How BZ will disclose this problem in their annual

report.

8 A review of board meeting minutes to understand how

BZ has reacted to this problem and how they intend

to respond in the future, (i.e., rebuild or abandon

operations in Country X).