The following scenario relates to questions 1 – 5.
You are an audit senior of Oval & Co and your firm has recently been appointed as the auditor to Fine store Products (Fine Store), a large company which sells televisions, DVD players and Bluray Disc players to electrical retailers.
You are planning the audit for the year ended 31 January 20X8 and your audit manager has asked you to produce both the audit strategy document and the detailed audit plan, including an assessment of materiality.
In order to assist you in your planning work you have visited Fine Store, where you obtained the following information.
Sales have increased during the year ended 31 January 20X8 following a move to attract new customers by offering extended credit. The new credit arrangements allow customers three months' credit, rather than the one-month credit period allowed previously. As a result of this change, you have calculated that the receivables collection period has increased from 49 days to 127 days.
Fine Store installed a new computerized inventory control system, which began operating on 1 June 20X7. Since the inventory control system records both inventory movements and current inventory quantities, Fine Store is proposing to use the inventory quantities on the computer to value the inventory at the year-end rather than carrying out an inventory count.
The production director informed you that in the last month or so there have been reliability problems with the company's products which have resulted in some customers refusing to pay for the products.
As part of the planning process you also undertake a risk assessment. Based on the information you have obtained to date you have identified several audit risks which you feel your team will need to address. The first risk relates to the extended credit terms offered by Fine Store to its customers, and the recent product reliability problems resulting in customers' refusal to pay.
A second audit risk relates to the computerized inventory control system which was implemented on 1 June 20X7. You are concerned about whether data was accurately transferred into the new system, and whether it is sufficiently reliable to determine the quantity of inventory for the yearend financial statements.