Problem 1 AuditorAs audit senior in Carollo and Co and you are commencing the planning of the audit of thisnew client, Celestial Co, for the year ending 31 August 2020.Client dataA sandals manufacturer, Celestial Company in business for 25 years, with a productionfacility, warehouse and administration offices operating from one central site.Celestial sells all of its goods to large retail stores, with 70% being to one large chain storeShoetings. Celestial has a one year contract to be the sole supplier of sandals to Shoetings. Itsecured the contract through significantly reducing prices and offering a four-month creditperiod; the company’s normal credit period is one month.OperationsTwo years ago Celestial reduced the level of goods directly manufactured and instead startedto import sandals from East Asia; approximately 70% is imported and 30% manufactured.Purchase orders for overseas sandals are made six months in advance and goods can be intransit for up to two months. Celestial accounts for the inventory when it receives the goods.Within the production facility is a large amount of old plant and equipment that is nowredundant and has minimal scrap value.In 2020 Celestial has introduced a perpetual inventory counting system to avoid thedisruption of a year-end inventory count. The warehouse has been divided into 10 areas andthese are each to be counted once over the year. The counting team includes a member of theinternal audit department and a warehouse staff member. The following procedures havebeen adopted: The team prints the inventory quantities and descriptions from the system and theserecords are then compared to the inventory physically present. Any discrepancies in relation to quantities are noted on the inventory sheets, includingany items not listed on the sheets but present in the warehouse area. Any damaged or old items are noted and they are removed from the inventory sheets. The sheets are then passed to the accounting department for adjustments to be made tothe records when the count has finished. During the counts there will continue to be inventory movements with goods arrivingand leaving the warehouse.At the year-end it is proposed that the inventory will be based on the underlying records.Traditionally, Celestial has maintained an inventory provision based on 1% of the inventoryvalue, but management feels that as inventory is being reviewed more regularly it no longerneeds this provision.AccountantIn May 2020 Celestial had a dispute with its accountant and he immediately left the company.The company has temporarily asked the accounting assistant to take over the role while theyrecruit a permanent replacement. The former accountant has notified Celestial that he intendsto sue for unfair dismissal. The company is not proposing to make any provision ordisclosures for this, as they are confident the claim has no merit.Required:(a) Discuss the importance of assessing risks at the planning stage of an audit. (b) Identify and explain the audit risks identified at the planning stage of the audit onCelestial Co. (c) Discuss the ways in which Carollo’s observations made during the course of the plant tour will be of help in planning and conducting the audit; Carollo was required to tourthe client’s plant facilities on acceptance of the engagement from Celestial Co.
Problem 1
Auditor
As audit senior in Carollo and Co and you are commencing the planning of the audit of this
new client, Celestial Co, for the year ending 31 August 2020.
Client data
A sandals manufacturer, Celestial Company in business for 25 years, with a production
facility, warehouse and administration offices operating from one central site.
Celestial sells all of its goods to large retail stores, with 70% being to one large chain store
Shoetings. Celestial has a one year contract to be the sole supplier of sandals to Shoetings. It
secured the contract through significantly reducing prices and offering a four-month credit
period; the company’s normal credit period is one month.
Operations
Two years ago Celestial reduced the level of goods directly manufactured and instead started
to import sandals from East Asia; approximately 70% is imported and 30% manufactured.
Purchase orders for overseas sandals are made six months in advance and goods can be in
transit for up to two months. Celestial accounts for the inventory when it receives the goods.
Within the production facility is a large amount of old plant and equipment that is now
redundant and has minimal scrap value.
In 2020 Celestial has introduced a perpetual inventory counting system to avoid the
disruption of a year-end inventory count. The warehouse has been divided into 10 areas and
these are each to be counted once over the year. The counting team includes a member of the
internal audit department and a warehouse staff member. The following procedures have
been adopted:
The team prints the inventory quantities and descriptions from the system and these
records are then compared to the inventory physically present.
Any discrepancies in relation to quantities are noted on the inventory sheets, including
any items not listed on the sheets but present in the warehouse area.
Any damaged or old items are noted and they are removed from the inventory sheets.
The sheets are then passed to the accounting department for adjustments to be made to
the records when the count has finished.
During the counts there will continue to be inventory movements with goods arriving
and leaving the warehouse.
At the year-end it is proposed that the inventory will be based on the underlying records.
Traditionally, Celestial has maintained an inventory provision based on 1% of the inventory
value, but management feels that as inventory is being reviewed more regularly it no longer
needs this provision.
Accountant
In May 2020 Celestial had a dispute with its accountant and he immediately left the company.
The company has temporarily asked the accounting assistant to take over the role while they
recruit a permanent replacement. The former accountant has notified Celestial that he intends
to sue for unfair dismissal. The company is not proposing to make any provision or
disclosures for this, as they are confident the claim has no merit.
Required:
(a) Discuss the importance of assessing risks at the planning stage of an audit.
(b) Identify and explain the audit risks identified at the planning stage of the audit on
Celestial Co.
(c) Discuss the ways in which Carollo’s observations made during the course of the plant tour will be of help in planning and conducting the audit; Carollo was required to tour
the client’s plant facilities on acceptance of the engagement from Celestial Co.
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