MZ Communications Sdn. Bhd. is a large mobile phone company which operates a network of stores in countries across Malvives Island. The company’s year end is 30 September 2019 and is a new client for Sanusi & associates. Mr Sammy is the audit senior of Sanusi & Associates and have been provided with the following planning notes from the audit partner following his meeting with the finance director. MZ purchases goods from a supplier in South Asia and these goods are shipped to the company’s central warehouse. The goods are usually in transit for a month and the company correctly records the goods when received. MZ does not undertake a year-end inventory count, but carries out monthly continuous (perpetual) inventory counts and any errors identified are adjusted in the inventory system for that month. During the year, the company introduced a bonus based on sales for its sales persons. The bonus target was based on increasing the number of customers signing up for 36 month phone line contracts. This has been successful and revenue has increased by 30%, especially in the last few months of the year. The level of receivables is considerably higher than last year and there are concerns about the creditworthiness of some customers. MZ has a policy of revaluing its land and buildings and this year has updated the valuations of all land and buildings. During the year, the directors have each been paid a significant bonus, and they have included this within wages and salaries. Separate disclosure of the bonus is required by local legislation. Required:
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MZ Communications Sdn. Bhd. is a large mobile phone company which operates a network of stores in countries across Malvives Island. The company’s year end is 30 September 2019 and is a new client for Sanusi & associates. Mr Sammy is the audit senior of Sanusi & Associates and have been provided with the following planning notes from the audit partner following his meeting with the finance director. MZ purchases goods from a supplier in South Asia and these goods are shipped to the company’s central warehouse. The goods are usually in transit for a month and the company correctly records the goods when received. MZ does not undertake a year-end inventory count, but carries out monthly continuous (perpetual) inventory counts and any errors identified are adjusted in the inventory system for that month. During the year, the company introduced a bonus based on sales for its sales persons. The bonus target was based on increasing the number of customers signing up for 36 month phone line contracts. This has been successful and revenue has increased by 30%, especially in the last few months of the year. The level of receivables is considerably higher than last year and there are concerns about the creditworthiness of some customers. MZ has a policy of revaluing its land and buildings and this year has updated the valuations of all land and buildings. During the year, the directors have each been paid a significant bonus, and they have included this within wages and salaries. Separate disclosure of the bonus is required by local legislation.
Required:
a. Explain how the auditor assess control risk in the inventory process of MZ Communications Sdn. Bhd. by providing ONE (1) example each.
b. Discuss the potential risk during audit planning of MZ Communications Sdn. Bhd. based on the notes given by the audit partner.
c. Assess how the auditor’s response to each risk of MZ Communications Sdn. Bhd. in (a).
d. Recognise the auditor’s responsibilities for related parties and related party transactions of MZ Communications Sdn. Bhd.
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