Audit and Assurance case study help

ABCCBA

HI, Could anyone give me an idea or advice to study this topic, i have no idea to how to identify the audit risks as below. thank you!

Phelan’s Perfumes is a long-established family company that manufactures cosmetic fragrances and perfumes. These are sold to customers who re-package and market them under their own brand names. The company has six manufacturing units spread across Ireland. The machinery in two of these units has recently been upgraded to improve the speed of the production process.

John Phelan, who had been managing director for 23 years, died just over a year ago. Mary Corbett has been promoted from sales director to take over as managing director, and a new sales director has been brought in from outside the company. The new sales director recently increased the credit period offered to customers from 30 to 90 days in an attempt to encourage new business and improve sales which have been declining since the death of John Phelan.

The finance director, Sean Mooney, has recently moved from a full-time to a part- time role, as he wishes to spend more time with his family. He has announced his intention to leave within the next 12 months, and the company is seeking a full-time replacement.
Profits have been falling over the last three years. The company wishes to gain a listing on the Stock Exchange, and all efforts are being focused on reversing the alarming profit trend.

A bonus scheme has recently been introduced, where certain managers and directors are paid a lump sum if production exceeds a certain level.

power101

ABCCBA wrote: »

HI, Could anyone give me an idea or advice to study this topic, i have no idea to how to identify the audit risks as below. thank you!

Phelan’s Perfumes is a long-established family company that manufactures cosmetic fragrances and perfumes. These are sold to customers who re-package and market them under their own brand names. The company has six manufacturing units spread across Ireland. The machinery in two of these units has recently been upgraded to improve the speed of the production process.

John Phelan, who had been managing director for 23 years, died just over a year ago. Mary Corbett has been promoted from sales director to take over as managing director, and a new sales director has been brought in from outside the company. The new sales director recently increased the credit period offered to customers from 30 to 90 days in an attempt to encourage new business and improve sales which have been declining since the death of John Phelan.

The finance director, Sean Mooney, has recently moved from a full-time to a part- time role, as he wishes to spend more time with his family. He has announced his intention to leave within the next 12 months, and the company is seeking a full-time replacement.
Profits have been falling over the last three years. The company wishes to gain a listing on the Stock Exchange, and all efforts are being focused on reversing the alarming profit trend.

A bonus scheme has recently been introduced, where certain managers and directors are paid a lump sum if production exceeds a certain level.

I don't work in Audit specifically but there are some clear risks easily identifiable anyway.

1) Machinery improved/upgraded. Has depreciation here and revaluation been correctly applied. Were the machines replaced or just improved? Was old machinery disposed of.
2)Mary Corbett as managing director. What experience does she have.
3)Credit line expanded to 90 days. Bad debt risk
4) Finance director no longer has as much interest in company. He has moved to part time and is looking to leave the company completely. Not as much oversight.
5) Bonus scheme is ridiculous. It is based on production but we were told already that the problem is sales. This could mean that stocks are inflated and also that this is being used to inflate profits ahead of the stock exchange listing.

These are the main points to focus on. You will have to go through each one explaining the risks fully.

dbran

You missed the most important one!

Going concern-profits are falling alarmingly. The effect of the new debt collection policy on cash flow as well as the lack of effective control over the finances.

There is also the real risk that sales are going to be overstated by the new sales director and as the debtors wont pay for 90 days it will be harder to trace if the sales are bogus or made up.

The fact the company is looking for a listing will increase the overall audit risk because their will be a greater level of review of the accounts from third parties and the auditor will have a greater then normal risk of being sued if he misses something.

Just some quick thoughts.

dbran