Question
The final report that John wants you to prepare for him is for the audit client Malos Ojos Limited (MO), who imports and distributes sunglasses. The sunglasses industry in Australia is extremely seasonal.
Background
MO is a well established company in a very competitive market. The company competes with a number of established manufacturers and distributors with well recognised brand names. MO's main competitors in the Australian sunglasses market are Reflecta and Zest.
MO has a handful of suppliers for its products, all of which are based in Australia. The company distributes to retail stores where stock is held on consignment within the stores. Major customers in this segment include Myer, David Jones and Sunglass Hut. This segment comprises 70% of MO's total sales.
The company has a high volume of casual employees who work during the peak seasonal periods. Casual staff are needed during the busy times to support the increase in workload in the areas of administration on (data operators and clerical staff), distribution (warehouse), delivery (truck drivers), sales and marketing.
It is currently 30 May 2013. You are in the process of finalising the planning for MO audit engagement for the financial year ending 31 December 2013. Your team has identified sales, payroll expense, trade receivables and inventory as the significant risks.
Sales
In respect of sales, the specific audit concern is the timing of the recognition of the consignment stock sales as there is a lag of up to two weeks in the sales information being transferred to MO by the retail stores.
You are also concerned about the high level of credit notes historically processed in the first two weeks of January each year. This is due to incorrect information supplied by retailers' stores as to mid to late December sales attributed to MO, but actually belonging to Reflecta and Zest. These errors are a result of the large number of pre-Christmas transactions that the retailers' computer systems have difficulty capturing correctly.
Trade receivables
You have now turned your attention to trade receivables balance. Given the issues identified with consignment sales, you are particularly concerned about the existence assertion with respect to the retail debtors at year end. You are considering using alternative procedures to debtor confirmations as the retail stores have a policy of not responding to audit confirmation requests.
Payroll
The company has a high volume of casual employees who work during the peak seasonal periods. Casual staff are needed during the busy times to support the increase in workload in the areas of administration on (data operators and clerical staff), distribution (warehouse), delivery (truck drivers), sales and marketing.
Other information
Other relevant facts about MO's employee profile are as follows:
- The peak selling periods when casual staff are required represent approximately eight months of the calendar year. For the past three years the average number of casual staff hired has been 120 staff per annum.
- The turnover of permanent employees is approximately 15 staff per annum. There are 75 permanent employees on the payroll at present. The permanent numbers have risen by 20% per annum for each of the past two years.
- There are a variety of industrial awards that support the wage and salary conditions of MO staff/ depending on whether they are casual or permanent and whether they work in the warehouse operations or as office staff. Casual staff do not receive annual or long service leave entitlements.
The audit team has identified payroll expense to be a significant risk.
REQUIRED:
Prepare a brief report for John that covers the following areas:
1. For MO's sales account at year end:
a. Identify the key assertion at risk (as per ASA 315.A111) with respect to the timing of the consignment stock sales (other that cut-off) and briefly explain why it is at risk.
b. Identify the key assertion at risk (as per ASA 315.111) in relation to the credit notes processed in early January and briefly explanation why it is at risk.
2. Design two (2) practical, relevant substantive tests of detail to substantiate the existence of trade receivables balance at year end.
3. You are also concerned about the impact of the issues in relation to consignment sales on the audit of the inventory balance.
a. Explain the impact of the timing of the recognition of the consignment sales and credit notes issued in January on the inventory account balance at year end.
b. Identify the key assertion at risk (as per ASA 315.A111) for each of these issues.
4. Identify the two (2) key assertions at risk (as per ASA 315. A111) at risk with respect to casual employees, briefly explain why they are at risk and outline a specific practical test of detail that would address the risk.