22) ZINBLE CO.
Zinble Co is a print supplier to businesses, printing catalogues, leaflets, training manuals and stationery to order. It specialises in using 100% recycled paper in its printing, a fact which is promoted heavily in its advertising.
You are a senior audit manager in Spark & Co, and you have just been placed in charge of the audit of Zinble Co after the manager previously assigned to the audit was moved to another urgent assignment. The audit for the year ended 31 August 20X1 is nearing completion, and the auditor’s report is due to be issued in two weeks’ time. You are currently reviewing a summary of matters for your considering, prepared by the audit senior.
Summary of issues for manager’s attention
Materiality has been determined as follows.
- $800,000 for assets and liabilities
- $250,000 for income and expenses
Issues related to audit work performed:
Audit procedures performed at the inventory count indicated that printed inventory items with a value of $130,000 were potentially obsolete. These items were mainly out of date training manuals. The finance director, Jacy Laurel, has not written off this inventory as she argues that the paper on which the items are printed can be recycled and used again in future printing orders. However, the items appear not to be recyclable as they are coated in plastic. The junior who performed the audit work on inventory has requested a written representation from management to confirm that the items can be recycled and no further procedures relevant to these items have been performed.
Zinble Co is involved in a court case with a competitor, Gobble Co, which alleges that a design used in Zinble Co’s printed material copies one of Gobble Co’s designs which are protected under copyright. Our evidence obtained is a verbal confirmation from Zinble Co’s lawyers that a claim of $125,000 has been made against Zinble Co, which is probable to be paid. Jacy Laurel has not made a provision, arguing that it is immaterial. Jacy refused our request to ask the lawyers to confirm their opinion on the matter in writing, saying it is not worth bothering the lawyers again on such a trivial matter.
- Audit work on current assets
Zinble Co made a loan of $6,000 to Jacy Laurel, the finance director, on 30 June 20X1. The amount is recognised as a current asset. The loan carries an interest rate of 4% which we have confirmed to be the market rate for short-term loans and we have concluded that the loan is an arm’s length transaction. Jacy has provided written confirmation that she intends to repay the loan by 31 March 20X2. The only other audit work performed was to agree the cash payment to the cash book. Details of the loan made to Jacy have not been separately disclosed in the financial statements.
Other issues for your attention:
Zinble Co currently adopts an accounting policy of recognising properties at cost. During the audit of non-current assets Zinble Co’s property manager said that the company is considering a change of accounting policy so that properties would be recognised at fair value from 1 January 20X2.
Non-current asset register
The audit of non-current assets was delayed by a week. We had asked for the non-current asset register reconciliation to be completed by the client prior to commencement of our audit procedures on non-current assets, but it seems that the person responsible for the reconciliation went on holiday having forgotten to prepare the reconciliation. This happened on last year’s audit as well, and the issue was discussed with the audit committee at that time.
We found during our testing of trade payables that an approved supplier list is not maintained, and invoices received are not always matched back to goods received notes. This was mentioned to the procurement manager, who said that suppliers are switched fairly often, depending on which supplier is the cheapest, so it would be difficult to maintain an up-to-date approved supplier list.
Mia Fern, Zinble Co’s financial controller, owns a holiday home overseas. It appears that she offered the audit team free use of the holiday home for three weeks after the audit, as a reward for the team’s hard work. She also bought lunch for the audit team on most days.
a. Assess the audit implications of the issues related to audit work performed, that have been raised by the audit senior. Your assessment should consider the sufficiency of evidence obtained, explain any adjustments that may be necessary to the financial statements, and describe the impact on the auditor’s report if these adjustments are not made. You should also recommend any further audit procedures necessary.