Assignment - Auditing
You are an Audit Senior currently planning the 30 June 2017 audit of Wild Forest Limited (WF), an Australian-owned company that produces and exports woodchips to Vietnam. WF's operations are located in New South Wales. Timber is purchased from forests nearby, processed into woodchips and immediately stockpiled for export at the company's shipyards. WF contracts timber cutters to deliver set tonnages of logs to its mill throughout the year. Woodchips are transported to Vietnam on charter vessels, which make an average of one trip a month. You note the following situations relating to WF:
(i) WF upgraded its accounts payable system to a fully integrated package that automatically updates the general ledger when creditor entries are made. Some problems have been experienced with the creditors ledger, which is split into US dollar ($US) and Australian dollar ($AUD) amounts. 50% of the timber purchased must be paid for in $US by WF. In some cases, $US amounts have been recorded as $AUD, resulting in inaccurate creditor balances. Month-end rollovers have also proved problematic, with creditor balances being incorrectly re-set to zero at the first of every month. This has required each creditor's history to be re-entered manually each month, a time-consuming process that is taking accounting staff away from their normal duties.
(ii) WF is planning to expand its operations to Melbourne, Perth and Sydney. It is applying for a loan from the bank to get funding for the expansion. Before granting the loan, the bank requires WF to provide them with the audited financial statement. The unaudited figures of current year suggest revenue to have increased significantly by 30 percent from last year. The Finance Director of WF, Mr. Bradley Stallone is keen to set up an internal audit department. Currently the project appears to have stalled, as some of the senior executives do not foresee the benefit of setting up such a department and are unwilling to commit any additional funds or resources on this plan. The senior executives feel that the same funds can be spent in expanding operations.
(iii) During the year, WF's Managing Director of the past 10 years retired and a new Managing Director was appointed. The new Managing Director, Sheldon Cooper, has previously worked as a Financial Controller in the fashion industry and is new to the forestry industry. Soon after Sheldon was appointed as the Managing Director, WF introduced bonuses for its sales staff to help achieve budgeted sales for the year. The bonuses are an increasing percentage of the gross sales made, by each sales person, above certain monthly targets.
WF does not currently have a strong system of credit limit checks for its customers in place.
Required
1. Prepare a memorandum to the Audit Manager, outlining your risk assessment relating to Wild Forest Limited based on the above situations and your recommendations on the audit approach to be used.
2. For each of the above situations relating to Wild Forest Limited, answer the following:
(a) Identify and discuss why the above situation represents a risk.
(b) By applying auditing knowledge, identify the main account or group of accounts affected by this risk in the audit plan.
(c) Identify how the audit plan will be affected by the risks and recommend specific procedures to address these risks.