What is The business risk impact and the accounts (as well as the related assertions) most likely affected by the events outlined in relation to Knights Ltd.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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What is The business risk impact and the accounts (as well as the related assertions) most likely affected by the events outlined in relation to Knights Ltd.

 

Knights Ltd

Wayne tells you he is planning the 30 June 2021 Audit of Knights Ltd, a company that produces and exports timber products to South East Asian countries. Knights contracts timber cutters to deliver set tonnages of logs to its mill throughout the year. The timber is then transported to Asia on charter vessels, which make an average of one trip a month. Timber is purchased in 50 hectare lots from plantations and state forests. In the past, 75% of timber was sourced from plantations, however this has fallen to 40% in the current year. The corresponding increase in timber sourced from state forests has angered environmental groups. Protests have been held in several forests, which has slowed production and frustrated the contractors, who are only paid once set tonnages of timber are delivered to the mill. These issues have meant that several shipments of timber have been delayed, angering the Japanese customers who are threatening to deduct 20% from amounts owing as compensation for lost production time. A recent downturn in the Japanese economy is also affecting forward orders, which have fallen by 15%. Wayne also says that one of Knights customers, Chip Corporation, is claiming that the latest batch of timber products it received was contaminated with a microbe. This microbe affects the physical structure of the timber, reducing its strength and durability. This has made the timber useless for heavy duty items such as china hutches and bookcases. Chip Ltd is refusing to pay its account, which is already five months overdue. Knights Ltd has launched an investigation into the allegations but has not been able to substantiate them as yet. 

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